30th January 2020
The Coronavirus and the Financial Markets
What is the coronavirus?
The coronavirus is a biological virus that originated in Wuhan China where more and more cases are being confirmed worldwide as the virus spreads. As a result of the outbreak, Wuhan, China has been put under lockdown however it is estimate more than 5 million people have already travelled out of China as part of the Lunar New Year celebrations when many people travel to see family and to celebrate, making it more likely to spread. It is easier to contain compared to viruses like SARS and Ebola because the virus spreads like the flu or common cold however there is no specific cure or vaccine yet… which makes matters worse.
How the financial markets are affected
Initially, the European markets were rebounding in the hopes the virus was being contained, however this didn’t hold up and markets worldwide have plummeted as China began locking down more cities and more lives were claimed. Markets continue to fall as Chinese authority say the spread is likely to continue and even accelerate (Hargreaves Lansdown PLC, 2020). Major stock exchanges and indexes have shown declines in the markets. FTSE has shown a drop of 2.7% as a result of the virus (Hargreaves Lansdown PLC, 2020), and the S&P index has decreased by 1.6 points as of Monday the 27th of January, which has affected a large portion of investments in companies listed on these indexes. The market drop has especially affected businesses linked to Chinese industry, including Chinese-owned businesses. An example is the travel industry, such as American Airlines which has gone down by 5% (Philips and Robertson, 2020). This is because China has issued a travel ban, preventing anyone, including people of different nationalities, from leaving in an attempt to contain the virus and prevent it from spreading any further. Airlines would therefore lose revenue as less people are flying on their planes from this region.
Despite it being a primarily local crisis, the effects are very much global, especially considering China is very important on the global stage economically and so many companies are linked to it. In addition to the travel industry, other industries have been affected, including oil prices which have fallen on international markets by 3%, while shares in hotel groups and luxury retailers – including Louis Vuitton, Gucci and Cartier have also taken a similar turn (Partington, 2020).
On the London Stock Exchange, mining companies including Rio Tinto, Glencore and Anglo American took an especially large hit, “amid fears that demand for metals and materials in China could falter” (Partington, 2020).
Not only are the changes to stock market values attributed to decreased revenue to the businesses affected by the crisis in China, but also Behavioural Finance plays a part, as investors are more likely to cash out their investments in these businesses out of fears the situation will get worse and returns will keep on declining, and in the worst possible outcome, there potentially could be no travel in and out of China for a long time (or forever). However this way of thinking is arguably irrational, as the situation is likely to improve considering how past outbreaks have all been solved, and when this does likely happen, stocks will rise again and likely exceed their values prior to the outbreak. It can potentially be advised, therefore, that investors retain their share-holdings in these companies until the situation dies down.
Summary of how the virus has affected businesses
The companies have been affected in multiple ways. Some companies such as American Airlines have fewer customers and as a result, less revenue because people in China have been prevented from leaving. Honda’s business operations in Wuhan have been stopped because employees and their family have been evacuated and as result of the slowed operations, revenue would be lower as a consequence (Bloomberg, 2020). On the other hand, some companies haven’t had reductions in revenue directly because of the virus but have seen a reduction in share price purely as a result of investors’ behaviour and that many of them have sold their shares out of fears their value will drop even further.
Our opinion is that there should be a protocol in place for businesses to follow in the event that this may happen in the future, so that they keep operations going. We think it’s more likely than not that the situation will soon be resolved, just like more serious outbreaks that were dealt with in the past have been, including the deadly 2009 flu outbreak. Because of this, we think panicking and selling out of shares isn’t the correct response, and instead people should maintain their investments and businesses should continue operations despite the situation as it’s likely the situation will improve. Share prices and returns won’t be damaged in the long term because ultimately the markets will stabilise, as they always have done.
Bloomberg, 2020. WeWork, Starbucks Shut Doors as Infections Spread: Virus Impact. [Online] Available at: https://www.bloomberg.com/news/articles/2020-01-27/tracking-the-virus-outbreak-s-impact-on-business-and-travel [Accessed 28th January 2020]. Hargreaves Lansdown PLC, 2020. London Midday: Stocks extend losses as coronavirus fears grip markets. [Online] Available at: https://www.hl.co.uk/shares/stock-market-news/market-reports/london-midday-stocks-extend-losses-as-coronavirus-fears-grip-markets [Accessed 28th January 2020]. Partington, R., 2020. World financial markets rocked by China coronavirus. [Online] Available at: https://www.theguardian.com/business/2020/jan/23/financial-markets-china-coronavirus-outbreak-economy [Accessed 28th January 2020]. Phillips, P., Robertson, K. 2020. Stocks Have Worst Day Since October Over Coronavirus Worries. [Online] Available at: https://www.nytimes.com/2020/01/27/business/stock-market-today.html [Accessed 28th January 2020]. The Guardian, 2020. Stocks and oil slump on fears over China virus outbreak – as it happened. [Online] Available at: https://www.theguardian.com/business/blog/live/2020/jan/27/stocks-and-oil-slide-on-fears-over-economic-impact-china-virus-outbreak-business-live [Accessed 28 January 2020]. The Guardian, n.d. Stocks and oil slump on fears over China viu. [Online].