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January 29, 2020

Coronavirus and Investment Implications

In response to the recent outbreak of the Coronavirus in China, we would like to provide a commentary summarizing the epidemic and possible investment implications.

As of the time of this writing, Coronavirus has infected 6,150 people and killed 132 people, mostly people with weak immune systems and underlying health conditions such as hypertension and diabetes. In the U.S., there are 5 confirmed cases, all travelers from China, and an additional 110 people under observation. The Centers for Disease Control and Prevention has asked all Americans to avoid all non-essential travel to China. The Department of Health and Human Sciences announced that it will expand the number of U.S. airports that screen for the virus from 5 to 20 in response to the serious public health threat.

SARS, a viral respiratory disease similar to Coronavirus, affected approximately 8,000 people during the 2003 outbreak and lead to the death of 800 people, mostly in China and Hong Kong. The 10% mortality rate for the SARS virus is much greater than the 2% mortality rate we experienced so far with the Coronavirus. SARS reduced the growth rate in China by 1 percentage point with hotel occupancy rates dropping by 60% and international travel dropping by 70% in affected areas. With the increase of China’s weight in global GDP from 4% in 2003 to 16% today, the economic effect of Coronavirus on global growth could be greater than the 0.1% hit to the global GDP that the SARS virus caused. The exact impact will depend on how fast the virus spreads and how fast it is contained.

Health scares rarely have major impact on global growth or stock market performance. According a recent Charles Schwab analysis of 13 outbreaks since 1981, MSCI World Index returned 0.8% over a one-month period following an outbreak, and the index was up 7.1% over a six-month period after an outbreak on average. While the panic could hit consumer confidence over the short-term, contagious diseases rarely bring consumer spending and economic growth to a halt, especially when financial conditions are as accommodative as they are now.

Over the short-term, it is not unreasonable to think that the higher level of uncertainty associated with Coronavirus could lead to a 5-10% selloff based on fear and panic, however we believe that there will not be a significant fundamental impact on the health of the U.S. economy or the U.S. financial markets. During the SARS epidemic in 2003, S&P 500 dropped by roughly 10% intra-year, but finished the year up 26%. However, both the selloff and the recovery in 2003 had other important factors that influenced the outcome such as the U.S. invasion of Iraq and the 2002 bear market that led to low equity valuations.

While the macro-impact of the Coronavirus may be small, a slowdown in China would naturally hit the crude oil and industrial commodity prices that are influenced by the Chinese economic growth, such as copper. Shares of travel related companies (casinos, hotels, airlines and travel agencies) and consumer businesses with high exposure to China (apparel, restaurant, cosmetics and luxury goods companies) have the highest economic vulnerability. We expect companies such as MGM Resorts, Las Vegas Sands, American Airlines, Marriott, Hilton, Nike, Estee Lauder, and Tapestry to experience higher volatility ahead, but economic impact and the stock market impact over the long-term should be negligible.

As always, we recommend maintaining a diversified portfolio with appropriate level of risk and keeping a long-term investing horizon as the best ways of navigating volatile markets.

If you have any questions or would like to have an in-depth discussion, please feel free to reach out to any of your Beacon team members.

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