FFor Nobel Prize winner Robert Shiller, capital markets are increasingly driven by stories rather than hard facts. A new narrative is currently chasing the old story on the stock exchanges. This new narrative is troubling and says: Global industrial society is vulnerable to pandemics.
At the beginning of the year, the old story seemed unshakable, which was as follows: The central banks immunize the markets against any injustice, be it global profit erosion, the risk of trade wars, the Middle East conflict or Brexit. But now everything is different.
With the international spread of the corona virus, what the marketers call a black swan (“Black Swan”) now appears to have occurred, an unpredictable event that questions everything. “The problem for most investors is that they are unprepared for this type of risk event – a real black swan, the consequences of which are unpredictable,” said Neil Wilson, chief market strategist at analysis firm Markets.com.
“Selling” is the diagnosis for market participants. The actors took the new reports surrounding the virus as an opportunity to part with all forms of investment that are considered risky. According to the simple motto: “Everything that has risen last has to get out”, they mainly sold shares on all stock exchanges at the beginning of the week.
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The German stock index (Dax) lost 2.8 percent on Monday. On Wall Street, technology stocks in particular were under selling pressure, which had been in high demand in the past few weeks. The US tech index Nasdaq slipped up to 2.4 percent during the day. The Asian markets also posted heavy losses.
The Japanese Nikkei ended the trade more than two percent in the red. The fact that there were no major disruptions on China’s stock exchanges was due to the fact that the markets there are closed due to the New Year celebrations.
Overall, a price of $ 1.7 trillion evaporated on the global stock exchanges. This corresponds to Canada’s annual economic output. This massive loss of prosperity was only caused by the change in the narrative. However, the markets were particularly vulnerable to such a setback.
Recently, new records had been repeatedly set. After months of rallying, a certain carelessness had spread among the market participants. This can be seen in the fear index Vix, which sank to ever new lows. This suggests that hardly any investor has hedged against extreme risks.
The actors are all the more appalled by the appearance of the black swan named Corona. “Risk aversion is contagious, the corona virus has now captured and affected confidence across all asset classes,” said Kit Juckes, market strategist at major French bank Société Générale.
“In contrast to the Middle East conflict or the North Korean missile tests, Corona should be a catalyst with effect. The reason: For small investors, the focus is on the topic, ”writes Mark Cudmore at Bloomberg Financial Services. Films like “Outbreak” and “Contagion” would have shown that the fear of a pandemic hits a nerve in the general population.
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“It’s an understandable phobia that can reach your own front door – unlike conflicts that take place in the distance,” said Cudmore. Therefore, the potential damage from the new disease is worse than the price losses after the escalation of the conflict in Iran.
The growth engine of the global economy is stuttering
How big the real damage will be is extremely difficult to calculate. It only seems clear that a large part of the Chinese economy is coming to a standstill: restaurants are closed, traffic in parts of the country has stopped, and public events have been canceled. Foreign companies withdraw their employees from the affected provinces.
All of this happens at a time when the Chinese usually consume a lot, namely during the New Year celebrations.
The effects on a global level are not yet foreseeable. The People’s Republic has been the growth engine of the global economy for years. China in particular dominates the demand for capital goods and raw materials. Accordingly, the oil price and the prices for industrial metals have come under considerable pressure in recent days.
But the Middle Kingdom has also become a major player in tourism. The Chinese, who love to travel, spend more than $ 250 billion abroad, more than any other nation. The People’s Republic has also become a destination of great importance for business trips. With a minus of almost 16 percent in the Dax, Lufthansa shares are the biggest loser this year.
For lack of valid data, strategists consult previous pandemics. An obvious comparison is the Sars pandemic of 2003. Even then, the new pathogen, which affects the respiratory tract and lungs similarly to the coronavirus, originated in China. From there, the disease spread around the world.
In retrospect, economists estimated that Sars’ economic damage was only $ 40 billion, or 0.1 percent of the global gross domestic product at the time, but the duration and scale of the pandemic were unpredictable at the time the outbreak broke out. Accordingly, economic activities and investments came to a standstill – but only for a short time.
In 2003 there was a V-shaped recovery on the stock exchanges. Many observers reckon with such a pattern today. However, it is not certain that the markets will quickly shake off the danger. Because 17 years ago, Sars encountered a global economy that had just bottomed out and was starting to recover from the previous downturn.
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Simulation game Plague Inc.
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Today, the virus is overtaking a global economy that has gone through one of the longest phases of recovery since World War II, and the Chinese economy has also become more susceptible to disruption. Last but not least, the Middle Kingdom today is much more dependent on domestic consumption. A shock event could bring the economy to a halt, but then it would have to be recalculated around the world.
This explains the discrepancy between the calculated Sars damage of $ 40 billion and the $ 1.7 trillion that was destroyed on the stock exchanges. If market participants are right, the coronavirus would be expected to cause a growth slump of the order of magnitude of two percent. As long as it is not certain how dangerous the new pathogen really is, the financial markets will continue to face troubled weeks.
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