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Peter Hardy, senior client portfolio manager, global value equities, American Century Investments.
Our job is to deal with economic realities as opposed to getting caught up in market speculation, fervor or reactions. And so, there’s an economic reality to all of these situations, and then the corresponding market reaction which may or may not jive.
I should acknowledge, with COVID-19, the name for the coronavirus currently in China, there is a third component, which is the human toll element. It’s important that we first discuss the human consequence of what is occurring and how heartbreaking it really is.
With that in mind, we have a history as a guide on previous outbreaks. There have been a bunch of these: SARS, MERS, Mad Cow, etc. COVID-19 differs from the previous ones. When you look at previous outbreaks, there was a fall-off in economic activity in the short run, and then everything bounced back pretty quickly once the situation is, or was, contained.
With COVID-19, the situation will also ultimately be contained, but there may be differences in the impacts. The number of people impacted, the measures utilized to contain the outbreak and some of the consequences have dwarfed previous flu outbreaks like SARS and MERS with COVID-19. Specifically, in order to contain COVID-19, China has had to quarantine large portions of its population. This has also coincided with the Lunar New Year. In China, you typically see a fall off in economic activity around Lunar New Year, but the economic activity has remained at depressed levels due to the quarantine. We get a variety of data which shows everything from coal and electricity usage, to pollution and industrial cities, and all this data confirms how slow the economic activity has been. Basically, everything has ground to a halt and that’s the current reality of the economics here in late February.
The real issue is how long economic activity remains depressed in China. COVID-19 may differ from the other situations, in that the economic activity may not rebound as aggressively as other outbreaks due to the current high levels of debt in China. The sustainability of high debt levels, really worldwide, but in this case, particularly China, is predicated on rosy assumptions. Many companies in China have a month or two of cash on hand and may not be able to meet their debt obligations if the quarantine and resulting economic weakness were to persist. Companies could go out of business, loan losses in China could accelerate and pressure on China’s economic situation could increase.
The bounce back isn’t necessarily a given. For our companies, the ones we have in our high-quality universe, the long-term economic impacts, like tariffs we previously discussed, would be minimal, if any.