The China Coronavirus and Deadly Echoes of SARS

By: TradeSmith Research Team

1 month ago | News

Wuhan, China is a city of 11 million people. That makes it bigger than any U.S. city, including New York and Los Angeles. Huanggang, a city of 7.5 million, is just 35 miles from Wuhan, and has more people than all but one metro area in the United States — New York City.

China has dozens of cities with gigantic populations. But these two cities matter because, as of this writing, the Chinese government has put them on lockdown, thanks to a rapidly spreading coronavirus.

“To my knowledge, trying to contain a city of 11 million people is new to science,” a representative of the World Health Organization told the Associated Press.

The containment effort also looks like a failure: Outbreak confirmations have already gone global. Hong Kong and Singapore have confirmed new cases of coronavirus. So have the United States, Thailand, Taiwan, Japan, and South Korea. Mexico and Russia have potential cases, too.

Macau, the island known to be an Asian gambling mecca, is considering a shutdown of all 40 of its casinos. Airport passengers are being screened. In “lockdown” areas, markets and social gathering places are being closed off — and scared citizens are not allowed to flee.

The world is on edge — and China’s leadership is under a white hot spotlight — because of what happened 17 years ago.

In 2002-2003, a different strain of coronavirus known as SARS, which stands for “severe acute respiratory syndrome,” broke out in Southern China. The SARS epidemic went global and ultimately killed 774 people.

The death toll for this new outbreak, as of January 2020, has climbed into the high teens. Nobody knows how high it will go. Looking back at 2003, the points of comparison are already grim.

A deadly virus outbreak is a drag on global growth. Lunar New Year celebrations are popular in January all across Asia; now hundreds of millions of travelers will stay home instead. Retail business in Asia will also take a hit as shoppers avoid public spaces. It’s little wonder China stocks are down sharply.  In the West too, travel and hospitality business will slow — think airlines and hotels — as travelers cancel their plans.

Crude oil and energy stocks are being hit particularly hard, with crude oil, already battered from a post-Iran reversal, down another 3% on coronavirus news. This is at least partly muscle memory from the 2002-2003 SARS event, when global commodity prices saw a mini-collapse.

Drawing from the SARS episode, Goldman Sachs predicts oil demand could fall by 260,000 barrels per day, with two-thirds of that coming from unused jet fuel (as travelers stay home). 

For broader markets, the impact remains unknown. If the outbreak dies out relatively quickly, markets could recover. If the outbreak severely worsens, however, the odds increase for a global slowdown, possibly tipping into global recession.

Paul Tudor Jones, one of the legendary hedge fund managers attending Davos, is worried.

“If you look at what happened in 2003… stock markets sold off double digits,” Jones told CNBC. “If you look at the escalation of the reported cases, it feels a lot like that. There’s no vaccination. There’s no cure. … If I was an investor, I’d be really nervous.”

On the bullish side of the ledger, speculators are piling into a company called Alpha Pro Tech (symbol APT), a micro-cap with a market value below $70 million.

The stock is up nearly 50% in the past few days, again on muscle memory: In the SARS episode from 17 years ago, APT rose hundreds of percentage points. The company manufactures “disposable protective apparel” and “infection control products,” which means business is good when people are freaking out.

We would never recommend chasing a micro-cap — that’s a good way to get burned — but APT is a bellwether for how investors are feeling. If the vertical spike gets even more vertical, watch out.

Global equity markets are entering 2020 on an extremely strong footing. So, if the coronavirus is contained in a reasonable amount of time, stocks are likely to weather this storm, too, and the major U.S. indexes are generally reflecting this with calm trading.

If the outbreak plays out in a worst-case-scenario type of way, however, all bets are off — and four more Chinese cities have gone on lockdown just in the time this was written.

TradeSmith Research Team

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