Most Asian indices plunged on Monday as worry about economic impact of the coronavirus escalated.
In China, the Shanghai composite dropped by more than 7 percent on its first trading day following the Chinese Lunar New Year, and the Shenzen composite fell by more than 8 percent.
Market observers said it is unlikely that U.S. stocks will record a similar plunge, but added that the recent spate of volatility should serve as a wake-up call to investors lulled into complacency by the market’s recent meteoric rise.
“Their market is just catching up to the rest of the world because they’ve been closed for a week,” Mitchell Goldberg, president of ClientFirst Strategy, said of the Chinese selloff. “It’s just that it’s all happening in one day.”
China’s economy already was on the ropes as a result of its trade war with the U.S. Profits fell in its industrial sector in 2019 for the first time in four years, and economists warn that the virus likely could push the country’s GDP growth below 6 percent.
“The expectation is that most of the global economic hit will be reflected in China. For 2020, China is expected to show only a 5.7 percent growth in GDP,” said Sam Stovall, chief investment strategist at CFRA Research.
While experts say a broad-based selloff is unlikely in the U.S. market, certain sectors are struggling as the coronavirus — which has sickened more than 17,000 people — continues to gain traction: Airlines, which have curtailed flights to China and lost that business, are the most visible casualties. Energy stocks are sagging on the expectation that the travel and work stoppages virtually sealing off China from the rest of the world will crimp demand, and expectations for a key profit metric for financial companies have slipped.
“The thought is, with energy, if we have reduced economic growth for 2020, that would drive down demand for energy,” Stovall said. “With interest rates coming down so dramatically, that would reduce net interest income banks can receive,” he said.
Investing experts say the biggest variable is one that still is, and likely will remain, an unknown for some time to come: How far and for how long the virus ultimately will spread.
National and global health organizations have expressed concern that containment measures put into place by countries, including the U.S., will have limited effectiveness if the illness can be transmitted before people start showing symptoms, as scientists suspect is the case.
“If this doesn’t last for a long time, then I think investors expect a rebound in demand and the stock market,” Goldberg said. “If this goes on for a few more weeks, you can basically kiss the entire first quarter good-bye and then earnings estimates and global GDP would be on the chopping block. If you expect that to happen, then a selloff is justified,” he said.
China’s position at the epicenter of global trade raises the complicating factor, and the stakes, for U.S. businesses, said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics.
“Normally, you’d say that the spillover would come from a slowdown in Chinese growth but this time the bigger and more immediate impact is to supply chains,” he said. “China is the biggest trading nation in the world, the assembly line of the global economy.”
While countries might be able to source products or components from other countries, China’s dominance in sectors like electronics and inputs containing rare-earth could leave manufacturers outside of China scrambling.
“This is a very interdependent global economy,” Kirkegaard said. “The clock is ticking.”