China’s Hubei province has revised its method of counting novel coronavirus pneumonia (COVID-19) infections, altering the diagnostic criteria, which has seen a huge jump in confirmed cases. Today Hubei Province reported 14,840 new confirmed cases, including 13,332 clinically diagnosed cases of COVID-19, almost 10 times compared to a day earlier. Have markets jumped the gun with respect to pricing the impact of this virus outbreak?
New cases in Hubei have jumped, why? Officials are now giving doctors greater discretion to clinically diagnose patients. A suspected case will be clinically diagnosed as long as the patient shows pulmonary lesions following a CT scan, even if they have not been given a nucleic acid test that detects the virus’ signature. This move is aimed at controlling the spread and providing a greater level of care to potentially infected patients, but it has also added a vast number of people to the official count. A detailed analysis of what this step means should be left for the medical professionals and epidemiologists, but one thing is for sure, there is a huge question mark over the reliability of official data from China. Health experts continue to question the timeliness and accuracy of the data. This means that within any forecast outcomes should be embedded a large degree of variability. The situation remains very fluid, however markets still don’t appear to be overly worried whilst the outbreak is relatively contained within China. This sentiment is somewhat complacent given China’s contribution to global growth and importance within intertwined global supply chains generating the potential for production bottle necks – particularly in tech and autos sectors, notwithstanding lost output as it relates to goods and services trade.
Shutdowns in China look to be more protracted than original expectations, many factories have not resumed production and cities are still on lockdown as measures are taken to limit the virus spread. This is particularly concerning not just in terms of the direct effects but also the capacity for non-linear secondary effects to cascade as shutdowns become more protracted, this is not priced into equities. However, upside momentum is strong, particularly for US equity indices, and investors are heeding the impending monetary and fiscal stimulus and influx of liquidity from China. Given the complete lack of reliable data it is prudent to maintain optionality at this stage, in order to protect against the potential for economic disruptions to drag well into Q2.
Restoring production back to full capacity will not be an easy task and activity will resume in dribs and drabs. Real-time data like property sales, coal consumption and road congestion displays a worrying picture for those expecting a quick return to capacity. The ultimate impact remains highly variable and the jury is still out as it relates to more protracted activity disruptions, so whilst markets seem resilient at present, that could change. A far slower return to normal that would have deeper and more pronounced effects cannot be ruled out until activity has started to normalise. This is not the case at present.
At this stage the hit to the US economy should be manageable, but China has been hit hard. This disruption will dent global growth. Forecasting that is dependent upon the 2003 SARs outbreak is likely not a good replica – China is a far larger component of the global economy than in 200, and consumer spending also makes up a bigger share of China's economy.
The commitment from China to maintain official growth targets using a range of stimulus measures is lending a degree of confidence to investors at this stage, along with notion FED and other central banks are ready to step in on any growth wobbles. In reality, China GDP in Q1 is likely to be close to 0 and potentially negative depending on how protracted the shutdown is as we wrote earlier this week. Investors are banking on ample liquidity and celebrating in advance looser financial conditions. China will be stepping on the stimulus pedal, along with providing heightened state support to encourage consumption and production. Another key focus is limiting job losses, employment remains key for social stability. But policymakers must tread a very fine line as years of credit driven growth, state intervention and industrial over capacity leaves a multitude of financial stability concerns. Tackling the sharp hit to growth must be counterbalanced against adding to vulnerabilities already present within China’s financial system.