Markets around the world are expected to take a beating as investor concerns over the coronavirus spread faster than the disease itself.
Despite the fact that most Asian markets were closed Monday due to the Lunar New Year holiday, foreign markets started the trend that will likely reverberate for days.
Japan’s Nikkei 225 dropped nearly 2% in afternoon trading while the European Stoxx 500 — which tracks some of the largest companies in Europe — was down 1.7% in early trading.
U.S. markets were poised for a big dip Monday as futures across the board were down more than 1%.
All over a virus outbreak thousands of miles away.
Why Investors Are Nervous About the Coronavirus
Aside from the physical implications of a virus that spreads like the flu, investors are thinking of something else: profits.
When there is an outbreak, people stay home. They don’t go out to eat, they don’t travel and they don’t go out shopping.
That means profits for restaurants, travel companies and retailers will go down because people aren’t spending their money with those companies.
Even if the outbreak stays mostly contained to China, because China is such a large player in the global economy, any slowdown there will impact on the U.S. economy.
In a Vox China report, China accounted for nearly 65% of the total increase in outward portfolio investments from emerging market economies. Additionally, in 2018 with a net asset position of $2.1 trillion, China was the third-largest creditor after Japan and Germany.
China owned $1.1 trillion in U.S. Treasurys, as of October 2019 and it also buys U.S. debt to support the value of the dollar.
If that wasn’t enough, China contributed to 6% of all revenue for S&P 500 companies over the last 12 months.
So, as China’s economy goes, so does the economy of several other nations.
Stocks Impacted More by the Coronavirus
Not all stocks are impacted by the news of the outbreak.
However, those who are, will be hit hard.
U.S. companies doing business in China will be negatively affected, but a lot of the brunt will be felt by travel companies.
Companies like United Airlines Holdings Inc. (Nasdaq: UAL), American Airlines Group Inc. (Nasdaq: AAL) and Southwest Airlines Co. (NYSE: LUV) are all taking a beating in Monday trading.
In the last month, American Airlines shares are down more than 5% while United Airlines has dropped more than 8%.
All three U.S.-based airlines have service to China.
Additionally, entertainment companies like Wynn Resorts Ltd. (Nasdaq: WYNN) Las Vegas Sands Corp. (NYSE: LVS) are getting hammered because of their casino businesses in Macao — a Chinese administrative region across the Pearl River Delta from Hong Kong.
Shares of Wynn Resorts are down 3.9% for the month of January while Las Vegas Sands shares are down 2.3% for the month.
Outside of China, the impacts to companies could be felt in places like Hawaii. According to USA Today, Chinese tourists spent an average of $349 per day in Hawaii. If potential tourists stay home, that will have a negative impact on hotels, restaurants and other retail outlets in the islands.
But travel companies may not be the only ones affected as Wuhan — ground zero for the coronavirus — is a significant manufacturing hub.
Businesses like Ikea and personal care manufacturer Beiersdorf have shut their facilities in the region down because of the outbreak, according to the South China Morning Post.
The Lesson from SARS
In 2003, the Severe Acute Respiratory Syndrome, or SARS epidemic impacted more than 8,000 people in 26 countries — killing 299 in Hong Kong — according to the World Health Organization.
During that time, companies like Cathay Pacific Airways Ltd. dropped nearly 30% into April 2003 and the Hong Kong economy was in a recession. But according to Bloomberg, shares of Cathay Pacific nearly doubled over the next year.
Many analysts believe the same dip and rapid recovery will happen with the coronavirus outbreak.
“This event will cause some short-term disruptions on stocks under our coverage, but as soon as the epidemic is under control, we believe they will be back to normal,” Baoying Zhai, an analyst with Citigroup Inc., wrote in a note reported by Bloomberg. “On China airports and airlines, we think there could be a similar pattern to the SARS period, with some lagged decline of passenger traffic, especially given this is happening during the Spring Festival transit.”
Analysts with JPMorgan said “although these recurring outbreaks are alarming, there appears to be no ominous message about public health issues as black swans for markets,” as reported by the Financial Times.
“Such episodes flare every few years but are fleeting,” analysts wrote. “The more epidemics prove containable, the less each subsequent one should move markets.”
Companies Winning Amid Coronavirus
While travel, entertainment and large manufacturing take a hit from the spread of the coronavirus, there are companies who stand to gain from the outbreak.
Indonesian-based Top Glove — a manufacturer of more than 70 billion pairs of rubber surgical gloves — has seen its stock jump nearly 14%. Two other companies — Kossan Rubber Industries and Supermax Corporation — both based in Malaysia and supplying latex gloves, have jumped nearly 10% in the last week, according to Ozy.com.
Additionally, Shanghai-based Zhende Medical, a company that makes medical supplies, has jumped more than 33% in the last week.
One other thing not to forget is that the Chinese government has a travel ban in place across eight cities in the Hubei province. As people stay home they are more likely to shop for goods online.
That’s good news for shares of Alibaba Group Holding Ltd. (NYSE: BABA) — China’s biggest e-commerce company — but only for its shares in China. Last week, shares of Alibaba were up nearly 2% in Hong Kong.
However, its shares listed on the New York Stock Exchange were expected to be hit hard this week.
Because so much is impacted by the outbreak, its impacts may be short, but they will be felt around the world. That’s how the coronavirus impacts the stock market.