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Markets in the time of Coronavirus Outbreak

Economists expect 2.8% global growth this year, the weakest since 2009. These fears about the effect of the Coronavirus outbreak on economic growth has led to mayhem in financial markets across the globe over the last week.

By Swati Saxena
Updated on :

COVID19 Spread

Coronavirus has infected more than 83,000 people globally and has reached all six habitable continents in the world. The list of countries affected by the virus has grown to a total of 57 with Belarus, Lithuania, New Zealand, Nigeria, Azerbaijan and the Netherlands reporting their first cases. About 10 countries reported their first virus cases in last 24 hours. China has seen maximum 78,824 cases with 2,788 deaths and is followed by South Korea which has reported 2022 Coronavirus cases till today. US is monitoring thousands of people who arrived on commercial flights from affected regions for Coronavirus symptoms. India has confirmed just three cases, while 23,531 people are under observation.

The concerning development is a growing number of discharged patients in China testing positive after recovering and this makes it harder to eradicate. Fatalities are also not showing any sign of easing. Though more cases are emerging across different parts of the world, WHO has not declared the outbreak as pandemic. Probably, they are being careful in declaring as it may amplify the unnecessary fear and stigma and affect the public health systems severely. Investors fear that the WHO may soon list the virus as pandemic which will have far-reaching impact on the global economy.

There are concerns as the outbreak has spread to the US and certain parts of Europe adversely impacting the global supply chain and economic outlook. Economists expect 2.8% global growth this year, the weakest since 2009. These fears about the effect of the Coronavirus outbreak on economic growth has led to mayhem in financial markets across the globe over the last week.

Market Mayhem

There is a sense of huge risk aversion across global markets. This risk aversion has led to indices across the globe to witness a sharp fall this week. It has been the worst weekly fall for global markets since the financial crisis more than a decade ago. US stocks have plummeted. Dow Jones posted its record point-wise plunge of 1190.95 points (4.42 %). US bond yields and Japanese yen are also severely affected.

Following the trend of rout in global indices, Indian markets have also crashed. BSE benchmark Sensex nosedived on Friday and logged its second-worst point-wise fall of 1448 pts in history. This has been the sixth day of consecutive slide for Indian markets. Investors have lost nearly Rs 12 lakh crore over this week. The selloff is witnessed across the economic sectors. Markets are sensing anxiety among investors about the possibility of real slow growth phase ahead on account of three factors – supply chain disruption, sectoral hangover, and demand destruction.

Supply Chain Disruption

The large-scale spread of the Coronavirus has put excessive strain on production cycle in several sectors due to disruption in the global supply chain. Globalisation of production in the last few decades have made the supply chain longer and complicated. The virus outbreak has forced companies to rethink supply chains and overseas production facilities. Thousands of manufacturing units are already facing production disruptions and if this outbreak is not contained, the supply chains will not be restored to normalcy any time soon. For example- Jaguar Land Rover’s production schedules in the UK and India are under strain due to its supply chains in Coronavirus-hit China. TVS Motor Company is hit by the lower level of supply of certain components, thereby hurting 10% of its planned production for February. VIP Industries is constrained by the production delays of luggage and bag-packs impacting the supply chain of luggage industry globally. Hyundai Motor had to suspend its production at one of its factories in South Korea’s Ulsan city after a worker tested positive for Coronavirus. Container Corporation of India’s volumes are also negatively impacted.

Coronavirus outbreak has caused supply problem for pharmaceutical industry as well. It has driven up ingredient prices for drug makers and has also exposed pharma companies’ dependence on China. India has depended heavily on China for chemicals across value chains. Though India has huge supply chain linkages to China, it is trying to reduce the impact by relying on existing inventories in the system. However, prolonged production delays in China will affect Indian production. Several Indian companies have tried to clear the air on their dependence on China in recent days.

Sectoral Hangover

The Coronavirus outbreak has severely impacted the travel and hospitality industry. It has effectively destroyed the entire conference industry and business travel. The Geneva Auto Show is cancelled as a measure to halt the spread. Tokyo Disney parks are closed for two weeks. Facebook has cancelled its annual developer conference. Japan is concerned that Olympic Games may get derailed. Russia has restricted entry of Iranians and South Koreans. India has temporarily suspended visa on arrival for Japanese and South Korean nationals and has cancelled all flight operations from Iran.

Demand Destruction

The outbreak has impacted consumer demand. People are worried about the outbreak and are travelling less. Hotels and travel agencies are forced to react and proactively manage the disruptive demand patterns currently impacting the industry. Oil prices have fallen significantly as outbreak has spread globally. Demand destruction for crude will further intensify as travel restrictions are continuously on rise. Flights in several countries are suspended in the wake of the outbreak. Industrial metals are on a slide. Demand destruction is visible on the consumption front as well. China’s passenger car sales tumbled 92% in first half of February. Sales of chicken and eggs in India have halved over the last few weeks due to rumours that linked them to the Coronavirus infection. If the fear of outbreak spreads, there could be even more such demand destruction impact.

Conclusion

It is very difficult to predict the extent and impact of Coronavirus globally with varying level of supply chain disruptions, quarantined workforces and travel restrictions across several parts of the world. However, a large-scale Coronavirus outbreak in India will put a heavy strain on the economy which is already reeling under the worse growth slowdown in a decade. India’s healthcare systems will be tested to its core which is very weak and underfunded. Financial markets are under severe stress and hoping for some respite. A clear sense about the spread and containment measures may help in this time of crisis. However, any real hope will come only from vaccine development.

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