Outbreak of New Virus In CHINA...
For starters, when you have a disease outbreak, you have to
spend a lot of money on diagnosing and treating patients. It’s also
imperative that you invest in preventive measures i.e. setting up
protocols to screen people in high-risk areas, commission studies to
understand the virus/epidemic better, coordinate with other countries to
contain the outbreak. But more importantly, human lifes are at stake.
When the healthcare infrastructure in your country can’t deal
with the crisis effectively, mortality rates shoot up. Ebola virus which took life of over 11,000 people in Guinea, Liberia, and Sierra. But that’s
not enough because the response team was so ill-equipped, over 150 health
care workers perished in the process.
As the World Health Organisation
notes — “Every single loss of a doctor or nurse diminishes response
capacity significantly” And this further increases the crisis.
When there are such devastating human costs involved, you
will see a material impact on the economy almost immediately. Such outbreak of virus results decrease tourist to the country, loss of country's GDP in medical emergency, indirect costs, decline in trade and overall sense of doom and gloom surrounding the country.
These are
people who participate in the labour force i.e. people who work, earn
and spend. The eventual loss in productivity because of a sudden
collapse of the nation's workforce. Imagine all the people that desist from visiting public parks, the
movies, trains etc. The fear of a widespread epidemic can manifest in
ways that further erodes confidence in an economy and hurt it in
perpetuity.
The only difference here is that we are not talking about
West African countries but China is different
in many ways. For one, it is tightly integrated into the global economy
through an extensive trade network built over the past few decades. And
this means a pandemic, the kind we are seeing with Corona virus can have
other more dangerous implications.
For instance, in 2003, Chinese authorities confirmed the
outbreak of the SARS virus. And between November 2002 and July 2003, we
had over 8000 cases, accompanied by over 700 deaths reported in 37
countries. Researchers pegged the economic loss at $40 Billion. (approx 2 %) The outbreak was exacerbated by the fact that containment was
particularly hard considering the extensive interaction between people
from China and other South Asian economies. And when the disease
spreads, we are talking about countries where population density is high
and the response mechanism is ineffective.
So, with 440 cases of Corona virus already being reported in
multiple countries, we need to find ways to better insulate potential
hotbeds from becoming potential deathbeds.
Impact on the markets?
Investors bet on stocks based on future expectations. When
these expectations sour, they’ll demand a higher risk premium. They’ll want a better price to invest in markets that could potentially
be impacted by the virus. Which is why you see selling, the moment
investors become aware of a global pandemic.
In the past, we have seen pharma stocks rally when news of an
outbreak hits mainstream media. If we are talking
about a potentially deadly disease, you’ll need extended medical care
for prospective patients and sales of pharmaceutical drugs do see an
immediate uptick. Past evidence has shown that consumer
spending goes down dramatically when news of an outbreak spreads. Investors have second thoughts when
parking their money in their favorite frozen foods brand.
Now readers do have to bear in mind that these are early
days. There have only been 11 deaths reported so far despite hundreds of
cases cropping up every day. Meanwhile, China seems to be dealing with
the issue rather proactively. Based on latest news, China has stopped all sorts of human movement to the infected city.
You never know when these things spiral out of
control.
Sources: Various publications
Disclaimer: The information provided herein is based on publicly available information and other sources believed to be reliable, but involve uncertainties that could cause actual events to differ materially from those expressed or implied in such statements. The document is given for general and information purpose and is neither an investment advice nor an offer to sell nor a solicitation. While due care has been exercised while preparing this document, we do not warrant the completeness or accuracy of the information. We will not accept any liability arising from the use of this material. The recipient of this material should rely on their investigations and take their own professional advice.
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