[Good Morning Stock Market] "Excessive Concern Over Novel Coronavirus Should Be Avoided... It Is Not a Driver Changing the Long-Term Trend of Epidemics"

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[Asia Economy Reporter Eunmo Koo] Despite the continued decline in the stock market due to concerns over the spread of the novel coronavirus infection (Wuhan pneumonia), an analysis suggests that excessive worry should be avoided considering that infectious diseases do not affect long-term trends. Since stock price trends vary by industry, it is advised to focus on defensive sectors such as internet, telecommunications, and pharmaceuticals for the time being.

◆Daejun Kim, Researcher at Korea Investment & Securities=The stock market has also been negatively affected by concerns over the spread of the novel coronavirus. The KOSPI's drop of more than 3% on the 28th is evidence of this. The market is currently focused on whether Wuhan pneumonia will become a 'counterblow' that breaks the early-year upward momentum.

It is judged that infectious diseases may cause temporary shocks to the market but do not affect long-term trends. In other words, once the epidemic passes, the market is expected to return to its pre-decline levels. During the 2003 SARS (Severe Acute Respiratory Syndrome) and 2015 MERS (Middle East Respiratory Syndrome) outbreaks, stock indices fell but then rebounded. A similar pattern is expected this time as well. Therefore, if the next 2 to 4 weeks, during which the number of confirmed cases will be determined, are navigated well, the market can normalize again.

Of course, the worst-case scenario must also be considered. This involves assuming the possibility that Wuhan pneumonia could spread globally like the 2009 'Novel Flu (H1N1)', i.e., a pandemic situation. However, even in such cases, the market showed recovery once the epidemic ended. In fact, respiratory pandemics have occurred four times since the 20th century: the Spanish Flu (1918), Asian Flu (1957), Hong Kong Flu (1968), and Novel Flu (2009). In most cases, global stock markets rebounded after short-term declines. This indicates that diseases are not the main drivers that change market trends.

Unlike the overall market, stock prices by industry may differ. In the short term, transportation and distribution sectors are expected to be the most disadvantaged. Transportation will be affected by interregional controls, and distribution by a sharp drop in demand due to weakened consumer sentiment. Although recovery is expected later, these sectors are likely to perform worse than the market for at least about a month.

On the other hand, internet, telecommunications, and pharmaceutical sectors are expected to follow relatively stable trajectories. Internet and telecommunications usage will inevitably increase due to restrictions on outdoor activities. Pharmaceuticals will respond to expectations of a windfall benefit from the spread of the infectious disease. Therefore, differentiated responses by industry are necessary in market strategies. For at least a month, the portfolio should be adjusted to sectors less affected by the epidemic. Once the market calms down, flexibility will be required to shift attention back to sectors that have experienced larger declines.

◆Ilgu Kim, Researcher at Hanwha Investment & Securities=It is unknown whether the novel coronavirus originating in Wuhan, China, will be more severe than SARS in 2003, but the global financial market's reaction is similar to that during SARS. Due to concerns that the global economic recovery may falter, prices of risk assets are falling while prices of safe assets are rising. Among risk assets, the price declines in oil and metals are particularly large because China accounts for a significant share of global demand for raw materials.

The World Health Organization (WHO) has not yet issued a global alert regarding the novel coronavirus. This is likely because no domestic infections unrelated to China have occurred in countries outside China so far. However, financial markets, which tend to price in the possibility of events before they occur, are reacting as if the novel coronavirus has spread globally.

During the SARS period, after WHO issued a global alert on March 12, 2003, oil prices fell about 28% over the following ten days. This time, since the new virus was identified on the 7th, oil prices have fallen 17%. Although the decline is smaller than during SARS, it can be seen as pricing in the possibility of a global spread of the epidemic. During SARS, the emergence of second and third super-spreaders accelerated the spread, causing further oil price declines. Similarly, until the increase in confirmed cases slows significantly this time, further declines in oil prices may occur.

Unlike oil prices, stock indices did not fall significantly during the SARS period. From March 12, 2003, when WHO issued the first global alert, to May 23, when travel warnings for Hong Kong and Guangdong Province in China were lifted?about 72 days?the global stock index experienced an initial adjustment of about 10% decline at the time of the alert, and another roughly 5% decline at the end of March when the global spread accelerated. Although closures of public facilities and travel restrictions to contain the epidemic may have short-term negative effects on the global economy, global investors judged that there would be no long-term adverse impact. During the global spread of SARS, yields on safe assets like U.S. Treasury bonds fell and gold prices rose, but after the travel warnings were lifted in late May, U.S. Treasury yields rose again and gold prices declined.

The impact of the novel coronavirus spread on financial markets is expected to be similar to that during SARS. Stock market declines will continue as the virus spreads globally, but the negative impact on the global economy will be short-lived as it was during SARS, so the stock market is expected to rise again once the virus spread subsides.