3 Possible Scenarios of COVID-19 Outbreak and its Impact on US Market

March 4, 2020

2020 started on a bad note, with the deadly virus COVID-19 appearing on the headline almost every day since its outbreak. In fact, the outbreak happened near the Chinese New Year period where hundreds of millions of people were travelling to, from and within China has made it hard to contain the spread of the virus. Following World Health Organization’s (WHO) declaring the outbreak a public health emergency concern, measures were put in place to contain the virus. These include the locking down of numerous cities, Singapore raising its Disease Outbreak Response (DORSCON) to orange, Princess Cruise passengers being prohibited from disembarking and most recently, South Korea’s raising its alert level to the highest [1].  All these naturally cause fear and uncertainty throughout the world. To help you ride out these uncertainties, we have prepared the 3 possible scenarios of COVID-19 outbreak and its impact on the US market.

 

Key Takeaways:

  1. Scientists around the world are working hard to develop vaccine for COVID-19
  2. Face masks, hand sanitizers, and Vitamin C are in high demand for an extended period.

 

China extended its Chinese New Year holiday to 2nd February 2020 across the country while those severely affected cities near Hubei Province extended theirs to 9th February 2020 [2]. Economic loss was experienced and supply networks were heavily disrupted as factories stopped manufacturing and logistic activities. The equity market also took a hit in January as a result of the COVID-19 virus outbreak. The chart below shows the performance of S&P 500 index, Shanghai Composite index and Hang Seng index since December 2019.

S&P 500 Index (White line), Shanghai Composite Index (Yellow line), Hang Seng Index (Red line)
S&P 500 Index (White line), Shanghai Composite Index (Yellow line), Hang Seng Index (Red line), Source: Bloomberg

 

In the chart above, we see that all 3 indexes gap down during the Chinese New Year period with S&P 500 being impacted as well, despite not having any holidays in the US market. The S&P 500 index was down for about 1.5% at the opening on Monday, 27th January 2020 and Hang Seng Index was down by 3% as it resumed trading on Wednesday, 29th January 2020. Due to the extended holidays, the Shanghai Composite Index resumed its trading on 3rd February 2020, with thereabout 9% down from its previous close of 2,976.52 on 23rd January 2020 to open at 2,716.69. After a short recovery, we still see another gap down 1 month later due to the outbreak concern outside of China, especially in Italy and South Korea. The investors in US market start to panic and pushed the market into the correction territory, which is more than 10% down from recent high. All 3 US indexes had their worst one-day plunge in point in history on 27th February and may reach their worst week since the 2008 financial crisis. The market remains highly volatile.

It has been more than 2 months since the first case was reported in Wuhan, China on 31st December 2019. As of 25th February 2020, approximately 80, 000 people were infected with 2,600 deaths worldwide, with majority of cases found within China. [3] While the virus is not as deadly as SARS or MERS, it is reported to be much more contagious. Despite the uncertainties, opportunities still exist in the market.

Following the article “Navigating through the Coronavirus Outbreak”, we further examine 3 possible scenarios on the outcome of this COVID-19 outbreak and how the US markets will perform under the respective scenarios:

Scenario 1: Vaccine is found or developed anytime soon (Best Case Scenario)

Despite medical teams across the globe working on developing a vaccine for COVID-19, there is currently none available at the moment. Having said that, based on past experiences on epidemic outbreaks, it does not seem likely that a vaccine will be developed anytime soon. Till date, there is no vaccine developed for SARS prior to it being fully contained which lasted for almost 8 months from period November 2002 to July 2003. [4]

Some US listed companies with revenue derived mainly from China are expected to take a hit. In Apple’s (AAPL.US) latest quarterly guidance, they are expecting a drop in the upcoming revenue forecast and production will be delayed due to the COVID-19 outbreak affecting its operation in China [5]. Alibaba (BABA.US) is said to expect a drop in revenues during its recent earnings releases (share price dropped) as CEO Daniel Zhang mentioned that the COVID-19 hit its supply chain and logistics network hard, causing delays in fulfilling orders [6]. Starbucks (SBUX.US), however managed to have a stable growth in China though analysts are expecting lesser crowds at its brick and mortar stores as people minimise social activities.

China, as the second largest economy in the world, plays an even bigger role in today’s economy than the period during the SARS outbreak. China plays a big part in many countries’ manufacturing and tourism industries. If a vaccine is developed, the world could possibly see economic growth and market rebound.

Ticker Name Mkt Cap (USD billion) Price (USD) Expenses Ratio Inception Date
SPY SPDR S&P 500 ETF 291.39 314.39 0.09% 22 JAN 1993
MCHI ISHARES MSCI CHINA ETF 4.84 62.06 0.59% 29 MAR 2011
EWH ISHARES MSCI HONG KONG ETF 1.94 22.92 0.49% 12 MAR 1996

Source: Bloomberg

 

Ticker Name Mkt Cap (USD billion) Price (USD) Analyst Call (Buy/Neutral/Sell) Price Target (USD)
AAPL AAPLE 1274 302.53 60% Buy 336.48
BABA ALIBABA 550.09 205.115 97% Buy 257.24
SBUX STARBUCKS 96.442 82.18 47% Buy 95.15

Source: Bloomberg

 

Scenario 2: Prolonged contamination (Normal Case Scenario)

This scenario is most likely to occur. Scientists are in the midst of developing a vaccine while countries are heightening its hygiene awareness alongside the increase in quarantine numbers. During the SARS outbreak, quarantine efforts successfully broke the chain of transmission after 8 months and the virus got milder over time. On the bright side, COVID-19 is said to be less fatal as compared to SARS. However, given that it is more contagious, it might take longer to contain the spread of the virus.

According to Dr Leong, there is a “natural tendency” for viruses to mutate to something milder due to different factors such as climate changes or bodies becoming immune to the virus overtime [7]. It may eventually become a flu-like virus, just like the H1N1 flu virus in 2009.

In the meantime, we see a surge in demand for products such as Vitamin C, sanitizers and face masks. Companies such as Unilever (UL.US) and Procter & Gamble (PG.US) that specialise in producing healthcare products will be likely to benefit from this outbreak. Johnson & Johnson (JNJ.US) and CVS Health (CVS.US) are also positioned to see growth during this epidemic.

Ticker Name Mkt Cap (USD billion) Price (USD) Analyst Call (Buy/Neutral/Sell) Price Target (USD)
PG PROCTER & GAMBLE 300.359 123.96 46% Buy 128.75
UL UNILEVER 148.309 56.86 100% Hold 59.5
JNJ JOHNSON & JOHNSON 380.401 146.75 64% Buy 160.35
CVS CVS HEALTH 84.261 68.37 69% Buy 84.08

Source: Bloomberg

 

Scenario 3: Virus mutated (Worst Case Scenario, the Black Swan)

The last scenario, also the worst outcome, is when the virus mutates and becomes even more infectious and deadly. Apart from mutation, there are speculations that the actual infected cases and death toll are in fact ambiguously higher than the official number released. This could be an indication that the virus is likely to be more contagious and deadly than what was officially reported.

As mentioned previously, crowds in public places are likely to be reduced alongside with the cancellation of activities to prevent the spread of the virus. The worst case scenario occurs when cities are locked down, people are asked to stay at home, and troops are mobilised to distribute daily essentials, as seen in Wuhan.

Of course no one hopes for this scenario but in the event it happened, one sector that may benefit from this could be the social media companies. With many starting to stay home, there is likely to be an increase in targeted online advertising. Investors, on the other hand, can adopt a forward-looking investment approach to take advantage of the growth opportunities offered by different social media platforms. Our previous article “The Social Media Giants” will give you insights on some thematic ETFs (such as Global X Social Media ETF, SOCL or First Trust Dow Jones Internet ETF, FDN and so on) that allow investors to gain exposure to the social media and internet industry.

Apart from ETFs that track the IoT companies, XLP.US is the largest ETF offering exposure to the consumer staples sector and DBA.US will be offering investors exposure to agriculture industry. Other than that, investors can also hedge their portfolio via precious metal ETF like SGOL.US for gold and SIVR.US for silver.

Ticker Name Mkt Cap (USD billion) Price (USD) Expenses Ratio Inception Date
XLP SPDR CONSUMER STAPLES ETF 13.99 62.19 0.13% 16 DEC 1998
DBA INVESCO AGRICULTURE ETF 0.321 15.61 0.85% 05 JAN 2007
SIVR ABERDEEN PHYSICAL SILVER ETF 0.415 17.64 0.30% 24 JUL 2009
SGOL ABERDEEN PHYSICAL GOLD ETF 1.46 15.84 0.17% 09 SEP 2009

Source: Bloomberg

 

Besides knowing what to look out for, investors must stay vigilant and know what to avoid. Sectors that have taken a hit may see worse performance and one example is the tourism industry. Hence, travel agencies, airlines and hospitality related stocks will be among the worst hit industry at this moment. The Oil and Gas sectors will also suffer due to the reduction in economic activities and transportation of goods.

We are still unsure about how the COVID-19 outbreak will turn out but we all have a role to play in combating the virus. We should adhere closely to the guidelines issued by WHO and Ministry of Health (MOH) and practise good hygiene by washing our hands frequently, staying away from crowded places and monitoring our health condition closely.

Stay Healthy, Stay Invested.

 

 

Data and information accurate as of 25th February 2020.

  1. https://www.channelnewsasia.com/
  2. https://www.china-briefing.com/news/china-extends-lunar-new-year-holiday-february-2-shanghai-february-9-contain-coronavirus-outbreak/
  3. https://www.who.int/emergencies/diseases/novel-coronavirus-2019
  4. https://www.latimes.com/california/story/2020-02-18/sars-coronavirus-china-epidemic
  5. https://www.apple.com/sg/newsroom/2020/02/investor-update-on-quarterly-guidance/
  6. https://www.reuters.com/article/us-alibaba-results/alibaba-warns-of-drop-in-e-commerce-revenues-due-to-coronavirus-idUSKBN2071HN
  7. https://www.channelnewsasia.com/news/singapore/covid-19-threat-could-erode-with-time-just-as-with-h1n1-say-12438600
  8. Bloomberg

About the author

Allen Tan
Dealer

Allen graduated from Nanyang Technological University with a Bachelor’s Degree, majoring in Economics with a minor in Business. He joined Phillip Securities in 2016 as an Equity Dealer in the Global Markets Team. He specialises in the US and Canada market and also supports the UK and Europe market.

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