COVID-19 – More than just a Virus

On January, 31 2020, the COVID-19 also known Corona virus emerged in Italy with the first two reported cases in the Lazio region. This created havoc within Europe as the numbers continued to surge to over 300 reported cases since the time of writing. Tension escalated when Italy reported its first death on the February 20, in the region of Lombardy, resulting in a total lockdown of the region with the tally reaching 11 deaths. The surge in cases in European sent the VIX Index, a measure of market volatility, up by 38% last Monday. Although some might think that this virus may be just like any other epidemic, one may have to think twice before saying so, as the timing of the virus may effect certain sectors and countries more than others causing repercussions for the months to come.

China, the world’s second largest economy and the leading global leading trading nation saw a major economic fallout from the global epidemic as according to  the Reuters poll of economists, China’s economic growth is expected to slow down to 4.5% in the first quarter of 2020 – registering the slowest pace since the last financial crises. Businesses are dealing with lost revenue and disrupted supply chains due to China’s factory shutdowns. Many companies and countries, such as Italy, which depend highly on the health of the Chinese economy, are facing periods of distress. The predicted first quarter hit from China is expected to leave its mark on Italy’s sensitive manufacturing economy.

The Italian economy is on the brink of a technical recession as the virus continues to damage the already shrinking economy. The economy registered a 0.3% decline during the last quarter of 2019, when compared to the previous quarter. Economists are predicting a further contraction in the first quarter of this year as a result of the epidemic. One can also add that two of the most effected regions, Lombardy and Veneto form a third of Italy’s output, while the finance Capital of Italy – Milan is on total lockdown. This increases the likelihood that the country falls back into a recession for the fourth time since 2008.

On the other side of the globe, the United States (U.S.) seems to be more immune from the effects of the virus because it relies far more heavily on economic activity inside the country through local and regional trade. Yet, key parts of the U.S. economy can’t function properly without parts or customers from abroad. A decline in travel, foreign tourists and supply disruptions for technology and automotive companies will likely have an impact on the U.S. Economy.

In fact, Goldman Sachs last Monday stated that it now predicts that the virus will decrease growth by 0.8% in the first quarter- which is double that originally estimated.

Tourism, transportation and manufacturing are predominately the three industries largely effected by this global epidemic. The travel and tourism industries were early hit on by economic disruption from the outbreak, with global airline revenues expected to decrease by $4-5billion in Q1 of 2020 as a result of flight cancellations according to the United Nations’s (UN) International Civil Aviation Organisation (ICAO). The iShares STOXX Europe 600 Travel & Leisure UCITS ETF (DE) which tracks the largest 600 companies in Europe within the travel and leisure industries, shows that following the surge in the number of cases particularly on February 24, companies lost on average almost 6% of their value, wiping out almost all the year-to-date gains.

Similarly, the iShares Transportation Average ETF which is composed of U.S. equities in the transportation sector was effected to a lower extent. US equities within the transportation industry lost around 3.6% on a single day last Monday, drifting the transportation equites further into negative territory.  A similar situation was seen in US Industrials where the index declined by around 3% in a single day.

Energy prices are also experiencing a period of distress. A slowdown in economic growth usually results in lower demand for oil. In fact, the International Energy Agency (IEA) has predicted the first drop in oil demand in a decade – expecting to fall by 435,000 barrels year-on-year. The price of Crude oil has declined by almost 11% this month.

After Markets experienced sharp declines during the last couple of days a question stands: are investors over reacting to the outbreak? Some may see this as an entry point to enter the market at cheaper levels, after a series of consecutive months in the black – but how low will markets go?

Julian Mangion, B. Com ICWIM, is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]