The coronavirus – a respiratory disease originating from China’s Wuhan province that has now claimed more than 100 lives – has sent shockwaves through global markets, threatening supply chains and depressing stocks in the travel and luxury sectors. The outbreak has evoked memories of the Sars epidemic in the early 2000s, which hammered inbound Chinese tourism and retail. For now, investors are being cautioned to stick with their portfolio strategies, although a move to a more defensive allocation may soon be advisable.
At the time of writing, major indices had started to recover losses after a fraught start to the week. The Stoxx 600 index, which follows Europe’s 600 largest companies, has edged upwards after a loss of 2.3 per cent on 27 January – its biggest drop since October 2019. The FTSE 100 lost 2.5 per cent on Monday. The price of brent crude oil, the international benchmark, fell to $59 a barrel, having soared through $70 earlier this month during the Iran crisis. Chinese markets remain closed.
Airline stocks with exposure to China have taken a battering since the severity of coronavirus became clearer. International Consolidated Airlines (IAG), which has exposure of less than 3 per cent to China based on capacity, according to UBS estimates, has seen its shares drop more than 6 per cent since the start of the week. It has8 per cent exposure to the Asia Pacific region on this basis. In response to the outbreak, IAG’s British Airways marque has offered customers due to travel to or from China until 23 February the option to receive a refund or re-book their flights. “We will continue to closely monitor the situation,” a spokesperson said.
The group is less vulnerable than Air France-KLM (Fra:AF) and Lufthansa (Ger:LHA), which both have 7 per cent exposure to China. Short-haul airlines have reacted less markedly to the virus owing to their lack of activity in Asia, although Asian travellers coming to Europe and consumer fears over air travel are likely to have driven Ryanair’s (RYA) shares down by 3 per cent this week.
Hotel and travel businesses, such as InterContinental Hotels (IHG), have also sustained share price losses following the coronavirus outbreak. Of IHG’s 836,541 hotel rooms, 14 per cent are located in Greater China, according to its latest annual report, and IHG is building its presence in the region with its Holiday Inn Express and EVEN brands. Its shares dropped more than 6 per cent from the start of the week.
Luxury companies have also suffered as fear over the spread of the virus has taken hold. China is a key market for the sector, constituting 35 per cent of its sales and more than 70 per cent of its growth, according to analysts at Morgan Stanley. The sector is also vulnerable to the knock-on impact of a slowdown in the travel industry. Morgan Stanley estimates that more than half of total luxury purchases made by Chinese nationals happen outside of Mainland China.
UK-listed Burberry (BRBY) is believed to be one of the companies most likely to be affected by the outbreak. Analysts at RBC Capital Markets estimate the group makes 24 per cent of its revenues in China, and a further 15 per cent from offshore Chinese consumption, behind jeweller Richemont and watchmaker Swatch. LVMH (FR:MC) is less exposed, but only a little, with onshore and offshore sales accounting for 17 per cent and 15 per cent, respectively.
The Sars outbreak in 2003 led to a 20 per cent reduction in international travel from China, with a far smaller impact on domestic travel. However, RBC said the speed of transmission and citywide shutdowns in China meant “the impact is likely to be felt more equally across domestic and international traveller flows”.
Sharp market falls will leave some investors questioning whether to row back from exposed equities and adopt a more defensive portfolio. Difficulties in obtaining live information on the outbreak from the Chinese authorities have made it more difficult for markets to track the virus. “An average incubation period of seven days makes it difficult to contain the spreading,” observed JPMorgan analysts, who added that an absence of fever symptoms in some cases has further complicated efforts to control the outbreak.
Nigel Green, chief executive of financial advisory firm deVere Group, warned most investors against knee-jerk reactions. “History teaches us that most issues of this kind have a short-term impact on stock markets,” he said. But Mr Green cautioned that an escalation in the crisis and higher casualty rates might force investors to adopt a more defensive approach.
“The health scare over the coronavirus outbreak is a serious concern,” JPMorgan analysts commented, “but we note past pandemics didn’t typically lead to sustained selling.”
