Fears of a pandemic are as contagious as the virus itself. How might a rapidly spreading virus affect our economy and the worldwide markets? Bottom line: If China slows, the world slows.
With an impact second only to that of the U.S., the Asian giant’s economy significantly affects worldwide markets. We saw this at the 2015-2016 turn, when China’s economic slowdown—a result of their shift from an infrastructure-building economy to one that is consumer based—rattled global markets and triggered the second market correction in less than six months.
The critical factor now is how quickly they can contain the virus. If contained within six weeks from the time of this writing—roughly by the end of March—then this will be a short-duration event that will only affect economic and market performance this quarter and possibly next.
If, however, the coronavirus is not contained by the end of March and becomes a true pandemic, then economic and investment market repercussions could persist into 2021.
The virtual shutdown of one of the largest economies would have a significant impact on supply chains. As people—not to mention cities, airplanes, and ships—are quarantined, the movement of goods and services will slow. The more the virus spreads, the more restrictions will increase, and economies will downshift further.
With just-in-time manufacturing processes, supply chains are days and weeks now, not months (hello, same-day delivery), and they are sensitive. A slow in goods could further shift manufacturing to other countries, as has already begun as a result of the U.S.-China trade wars. This will cause delays and likely increase the cost of goods sold for any of China’s current exports that move to other countries.
The virus is multiplying the uncertainty previously sparked by the U.S.-China trade wars. Though we’ve seen recent progress in the trade-agreement resolutions, this economic wildcard has been dragging down the markets for more than two years, since the Trump Administration imposed the first tariff on China in January 2018.
What we know about the coronavirus: It can jump from economy to economy too.
As part of our tactical investment strategy, we’re constantly looking forward to economic conditions to understand how they might impact risks and opportunities in the markets.
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Categories: Coronavirus, Market Outlook February 2020, Trade Wars, Trade War with China