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Special Analysis: How does the economy respond to a Pandemic

March 18, 2020

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Special Analysis: How does the economy respond to a Pandemic

The World Health Organisation (WHO) has declared Coronavirus a pandemic and many countries are taking never before seen measures to control it. Belgium has shut down schools for five weeks. The US has stopped all flights arriving from Europe for the next 30 days. And Australia has declared a national emergency, with social distancing enacted and all events over 500 people now cancelled, with further restrictions thought to follow. 

The World Health Organisation (WHO) has declared Coronavirus a pandemic and many countries are taking never before seen measures to control it. Belgium has shut down schools for five weeks. The US has stopped all flights arriving from Europe for the next 30 days. And Australia has declared a national emergency, with social distancing enacted and all events over 500 people now cancelled, with further restrictions thought to follow. 

The ambiguity of the situation and fears of the potential economic impact of the novel Coronavirus have got the stock market gyrating, with volatility at never before seen levels. The prevailing issue with this pandemic threat is that not only our quality of life and possibly health are affected in the immediate term, but many of us are also nervously looking to the horizon, to a time when the virus is controlled, the immediate threat is over and the economic costs begin to be truly counted.

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It is hard to imagine a current time mirroring the environment we find ourselves in today, however previous pandemics similarly affected worldwide markets in significant ways. Looking back at these instances, overall some patterns begin to emerge. It is clear that the reactionary market fallout is usually short-lived for pandemics, specifically Swine Flu and to an extent, Ebola. Once investor confidence returns as people seem convinced an end date is in sight, markets generally have recovered from these instances. But with a lot of ambiguity still remaining with Coronavirus, applying these previous examples is an imperfect comparison right now, due to the huge amount left to happen in this crisis.

It is however still relevant to look at what happens after a pandemic, historically, and look into how Coronavirus compares to previous pandemics for a rough guide into how the market and the economy may respond to such disruption. 

SARS

Coronavirus is similar to the SARS virus that caused a pandemic in 2003. However, there are a few factors that make them different beasts. 

SARS only reached 8100 known cases, but although SARS was less contagious, its 10% death toll was more than double that of today’s COVID-19. 

As SARS was easier to contain, it had little impact on the economy. The S&P 500 gained 14.59% after the first occurrence of SARS in 2002/3. Twelve months later, the broad-market benchmark had gone up 20.76%. 

The S&P 500 currently trades 22 times price to earnings.

 

Swine Flu

Up to 21% of the global population contracted Swine Flu in 2009. It killed 575 000 people, with 80% of fatalities under 65 years old. 

As it was affecting many more people of working age and it happened on the back of the GFC, Swine Flu had more potential for an economic crisis than SARS and thus has more in common with COVID-19. 

Despite the fears, six months after the Swine Flu pandemic, the S&P500 rose 18.72%. A year later, it was up 35.96%. 

 

Spanish Flu

It’s also useful to look at one of the worst pandemics in modern history: the Spanish Flu pandemic of 1919. 

Occurring at the end of WWI, Spanish Flu infected 500 million people around the world and killed 1.7% of the total global population. 

Despite WWI already having caused so much destruction, the market increased 50% nine months after the end of the Spanish Flu.   

 

Which sectors have been affected most by Coronavirus? 

During the Coronavirus outbreak, the worst-performing sectors have been airlines (-40%), hotels (-50%), energy (-47%), finance and banking (-33%), industry and manufacturing (-32%), and oil and gas (-30%). Overall discretionary spending has fallen 27% too. 

Will the sectors bounce back after COVID-19? To answer this question, we can only look to the past and make some educated assumptions based on other pandemics*. 

Following the SARS pandemic, three of the five worst-performing sectors became among the top-five best performers: diversified financial services, airlines, and software. 

A stimulus package for the Hong Kong economy created a rebound across their hardest-hit sectors and long term profitability remained largely unchanged. 

Jeffrey Kleintop, the chief global investment strategist at Charles Schwab, is optimistic that we’ll see a quick bounce back in the worst affected sectors including travel and consumer spending. 

“[While] there is always the chance that the next outbreak could have greater consequences, the global economy and markets have been relatively immune to the effects of past viral epidemics — even when the global economy was especially vulnerable to a shock,” said Jeffrey Kleintop. 

Camden National Wealth Management said that the S&P 500 rose an average of 9.27% after past pandemics. 

No one knows yet how big an impact the pandemic will have, or how much it will affect the market. But history has shown that in past pandemics, the markets have bounced back over time.

The prospect of an Australian recession is thought to be inevitable according to economists, however with the government readying another stimulus, the second in as many weeks, the length of time until a bounce back remains very much a topic of debate. 

 

*Past performance is not a reliable indicator of future performance

 


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