There is a great tweet I saw on the Coronavirus that I think encapsulates how to think about this type of event.

You can’t plan for it, and you can’t trade around it.  Especially when the epicenter is rural China.  At this point, we have no idea how bad it is as the Chinese are notorious for obfuscating and concealing any information that may make the government look bad.  They say about 100 people have died.  It could be 100, could be 1000, could be more.  It could be fully contained, it could be not contained at all.  The Chinese have locked down the entire province.  Countries have closed their borders to Chinese travelers, and multiple airlines have stopped flying to China.

What we do know is that the virus is highly contagious, has about a two week incubation period, and is now present in at least 15 countries.  We also know that the death rate of people infected is not particularly high.  Generally, it has only been those with compromised immune systems and prior respiratory issues that have died as a result of it.   Net: it is more contagious than SARS was, but less deadly.

It took more than 6 months for the number of SARS cases to surpass 5,000 in mainland China. China had 5,327 SARS cases between Nov. 1 2002 and July 31 2003, according to the World Health Organization.

On the other hand, it’s taken about a month for the number of new coronavirus cases to climb past 5,000 on Tuesday. The new virus was first officially reported in the Chinese city of Wuhan on Dec. 31.

According to China’s National Health Commission, the number of cases in mainland China stood at 5,974 at the end of Tuesday, up from 4,515 the prior day.

Initial figures from the government suggest that of the total confirmed cases in China, between 2% and 3% have died. The World Health Organization put the case fatality ratio for SARS at 7%.

Trying to make overall tactical shifts around this type of event is a losing proposition.  For more conservative clients, those in which protecting the downside is more important than participating in the upside, it may be prudent to take a “wait and see” approach and scale back equity exposure.  For more aggressive clients, the uncertainty and pullback on an already overbought market could be a buying opportunity.  The ultimate effect on global GDP is difficult to predict.  From Nomura:

China’s real GDP growth plunged by 2 percentage points (pp) from the first quarter to the second quarter of 2003 due to the SARS outbreak, Nomura analysts noted. “Based on our assumptions, real GDP growth in Q1 2020 could materially drop from the 6.0% pace achieved in Q4 2019, on a scale perhaps bigger then 2pp registered during the SARS outbreak in 2003.”

However, the analysts pointed out that “the coronavirus may prove to be only a temporary shock (both on the demand and supply sides) and may not necessarily leave a long-lasting impact.”

Still, “the scale of the current slowdown and timing of the recovery are mainly determined by the unfolding coronavirus, which remains uncertain,” Nomura said.

We will continue to monitor the situation and provide any important updates as more news comes in.