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Expect more Chinese support

Carnegie Asia fell 1.3 % this month.

By now, it is no surprise to anyone that the spread of the coronavirus has completely dominated news reporting and the stock market over the past month.

What started in China as a relatively limited viral infection has, two months later, developed into a full-scale global pandemic with 111,000 people infected. China still tops the table with some 80,000 cases, and further afield South Korea, Iran and Italy are the worst affected.

It is still a bit early to analyse the economic impact, but it is obvious that when factories stand still for almost a month this will have a big effect on GDP. The first quarter will be one of the worst for China’s GDP in modern times. For the full year the loss of production will peel away two percentage points of growth.

Not unexpectedly, the incoming financial data has been record-weak. The purchasing managers’ index (PMI) fell to 35, car sales fell by 80 percent compared to last year, and even the number of homes sold was at a record low.

The Chinese government is expected to come up with more support measures, but it is too early to say how effective they will be.

Despite all the negative news, Chinese equities have performed relatively well so far (up to and including February), with fairly moderate declines. The stock exchange has focused on two things: The momentum of transmission, i.e. that the number of new cases is falling; and new support measures via monetary policy, etc.

The impact of the SARS epidemic in 2003 shows that the stock market recovers before a disease plays out. SARS arrived in January 2003 and was over by July. The stock market fell 16 percent from January to March and then turned upward. SARS was a more limited epidemic, with 8,000 infected and 800 dead. Another factor that many people forget was that the US began an invasion of Iraq, the second Iraq war, in March 2003. It was then seen as the solution to another problem; the terrorist threat that began with 9/11 in the US. This view was later reassessed for several reasons, and I do not think this would be a desirable solution to save the world today either.

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