Over the past several weeks, the coronavirus (COVID-19) has reminded us that the world is still small and interconnected. The deadly illness may have originated in mainland China, but it has impacted citizens in at least 28 other countries as of this article’s publication date. While the health of those impacted is the more important story, the effect that this outbreak has had on global markets and trade flows is significant.
Global equity markets saw major selloffs in late January as fear of the spread of the virus intensified. However, markets rebounded this month in response to aggressive containment measures, which included quarantines and travel restrictions, as well as news of breakthroughs in developing treatments and vaccines for the virus.
Markets React as News Spreads
Social media has played a major role in accelerating the speed at which news (as well as misinformation) is moving around the world. On February 2, the World Health Organization (WHO) called the new coronavirus “a massive ‘infodemic,’” referring to “an overabundance of information—some accurate and some not—that makes it hard for people to find trustworthy sources and reliable guidance when they need it.” Previous viral outbreaks such as SARS, MERS, and Zika caused global panic but because of today’s social media, fear is amplified.
The chart below illustrates how the coronavirus has dominated the public consciousness and outlook for global companies. Using FactSet’s GeoRev exposure data, we indexed the returns of companies outside of China and Hong Kong with over 20% sales exposure to China and compared that to the MSCI All Country World Index excluding China and Hong Kong. We overlaid these returns with an area chart showing data from Google Trends for the search term “coronavirus.” The chart shows that as the news of the virus was growing, so was the relative decline in performance of our constructed index compared to the MSCI index. Just before the sharp decline, our index was outperforming by .75% but by the end of January, the same group of companies was underperforming by -3.15%.
One of the industries with the highest revenue exposure to China is semiconductor manufacturing (as defined by FactSet’s RBICS classification system) with an exposure of roughly 28%. With 17 of the 26 companies within this sub-universe reporting earnings outside of the peak coronavirus market frenzy, one potential noise factor has been partially mitigated in the analysis. However, we see the same pattern as before with relative outperformance turning negative by month-end and then rebounding in February.
In addition, the travel industry has been directly affected by efforts to contain the virus. We can see how much of an impact when comparing the performance of the MSCI ACWI – Airlines index to our Google Trends data for the coronavirus search. The chart below indicates both the substantial impact and lingering concerns over how this will affect the industry’s bottom line. Airlines around the world have halted service to mainland China. In the U.S., American Airlines, Delta Airlines, and United Airlines have canceled all flights to China until at least March or April.
With supply chains and customer bases more global than ever, it should be no surprise that events like this one are impacting markets around the world. The United States is certainly not immune. When presenting the semiannual Monetary Policy Report to the U.S. Congress last week, Fed Chair Jerome Powell cited the coronavirus as one of the risks to the economic outlook. He stated, “In particular, we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.” We can see the potential avenues for disruption when looking at the geographic revenue exposure of the MSCI USA index. This index has 38% of its revenue coming from the rest of the world with China as the second highest revenue exposure overall at 5.7%.
Europe will also be impacted. While Brexit has been a key issue for the United Kingdom and the European Union (EU), it is China that dominates revenue exposure for the UK, after domestic- and U.S.-based revenue. As shown below, only two EU countries crack the top eight (Germany and France) and their combined 6.2% exposure is less than China’s 8%.
The previous two examples were based on index-weighted exposures. Another way to calculate exposure is to take the aggregate revenue from China as a share of the total global revenue for that universe. Using FactSet GeoRev USD-denominated revenues for MSCI country indices, we calculated China’s unweighted percent revenue shares for key countries. The table below displays the top 20 MSCI country indices in terms of share of revenue from China (excluding China and Hong Kong). By this measure, Singapore tops the list with market exposure to China of nearly 21%.
As the number of cases and death toll continue to rise from the coronavirus, it’s impossible to accurately gauge the global economic impact. Where the next geopolitical crisis, pandemic, or natural disaster will occur is anyone’s guess, but it is important to have a true understanding of your portfolio exposure to weather any storm.
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