- February 27, 2020
- Posted by: Ramkumar
- Category: Mergers And Acquisitions
Coronavirus Impact On Global Stock Markets
The Coronavirus impact on global stock markets this week has unraveled some exciting insights. To understand this more deeply, let us review all the earlier crisis that has impacted global equity markets, at least since 2008. These disasters happened hastened by legislative advancements (Brexit), sometimes by states (trade wars), sometimes by combat and terrorism (the US/Iran standoff) and sometimes by economics (Greek default).
The coronavirus disaster is different. Firstly this disaster is not human-made and is consequently more challenging to prognosticate in courses of how it will play out.
- The virus (COVID-19) had its roots in China, though what caused it to flow into the human society is yet unclear and replete with intrigue theories. In an endeavor to keep the people from panicking, the Chinese government originally went into emergency mode, attempting to check the information that is being made public, and that has generated both ambiguity and suspicion about official claims.
- In China, the virus has had its most significant influence in the Wuhan province. The latest figures indicate that there are more than 100,000 cases of the illness, with more than 5000 casualties to date.
- The quickest spread has been to the adjacent Asian nations, with Singapore being a first mishap and South Korea the latest add-on. The virus has traversed boundaries and is displaying up in more remote parts of the world, often in sporadic instances. On February 25, the CDS cautioned Americans that the virus could make significant incursions in the United States and proposed that states plan cautionary steps.
- There is no vaccine for the infection, but the fatality rate from the virus seems to fluctuate across the society, with the very young and the very old being the most prone to die from it. Across geographies, there are more losses in Asia than in Europe or the United States. The overall death rate is low ( around 3%), but the hospitalization rates are high.
In summary, there is much more that we do not understand about COVID-19, than we do, at least at the moment. The virus has the potential to get designated a pandemic, and we do not, though, have a definite sense of how swiftly it will spread, how many souls will be affected and what will drive it into dormancy.
Earnings Growth: Indeed, at this initial stage in this mess, it is evident that the virus is hitting corporate services. The hotel and airlines are the most affected. It should appear as no shock that United Airlines stated, on February 24, 2020, that it was reversing its guidance for revenues this year, as it was expecting more reports. With others, it is anxiety about supply chain interruptions, particularly with Chinese facilities, and how this will change operations in the rest of the world. The Coronavirus will materially impact the earnings numbers of global companies.
- Drop-in 2020 Earnings: This is the figure that will indicate how you see Coronavirus influence the combined earnings on stocks in 2020. The numbers will cover not only earnings slumps induced by lower revenues growth at organizations like United Airlines but also the earnings drop precipitated by higher costs encountered by companies due to virus-associated difficulties (supply chain breakdowns). The broader the number of businesses that get hit, the more conspicuous the earnings will get affected. For instance, when we look at the 2008 banking disaster, it induced an earnings implosion, with revenues dwindling almost 40% in 2008, from 2007.
- Drop-in long term Earnings: In earlier disasters, where customers and workers stayed home, both for health reasons or because of panic, the business that got squandered as a consequence of the hazard was made up for when it crossed. If consumption gets suspended or deferred, the growth in consequent quarters needs to be higher to compensate for the lost business in the crisis quarter. It is difficult to ascertain how soon the consumption will be back on track after the coronavirus effect subsides to reverse the earnings decline.
Risk and Discount Rates: Subsequently, the required return on stocks will be affected, with one of the forces being evident and apparent in markets, in the form of the US treasury bond rate and the other being inherent, assuming the form of an equity risk premium. If investors become risk-averse, they will charge a higher equity risk premium. However, as the anxiety part disappears, this number will fall back as well, but possibly not to what it was before the disaster.
To conclude, the Coronavirus pandemic will trigger a meltdown and negative impact in global equity markets, with almost every industry, certain to witness an earnings decline. The companies that are directly affected by the virus are the hotels and the airline sector. These businesses are likely to witness a downside effect as the consequence of the Coronavirus.