Revisiting China’s Equity Markets as Coronavirus Spreads

Growing fears about the coronavirus have hit Chinese stocks. While markets will remain unstable until China gets the outbreak under control, equity investors should revisit lessons from previous epidemics and consider the potential longer-term effects of the current crisis.

As the death toll rose and global infections spread, investors’ reaction to the coronavirus intensified. The MSCI China A Onshore Index tumbled by 9.2% on February 3 in US-dollar terms, then rebounded by 3.1% the next day (Display). The declines followed a 2019 rally in which Chinese stocks surged by more than 37%. Investors fear that the lockdown of millions of people could inflict a big blow on China’s economy that might also affect global growth.

Market Rebounds Are Often Quick

These concerns are understandable. However, in similar past episodes, market corrections were relatively brief and comparatively shallow. For example, during the severe acute respiratory syndrome (SARS) epidemic in 2003, the Hang Seng Index dropped by about 7.7% from March 5 through April 25, when new infections were increasing, but recovered quickly when the situation improved (Display). Similar market patterns have played out in previous epidemics and pandemics. In each case, market sentiment shifted from initial panic to bargain-hunting when investors gained confidence that the disease had come under control.

For now, there’s no such certainty about the coronavirus. As a result, the volatility we’ve seen will probably persist until some tangible good news is received. But investors should also remember that the snap back from panic to positive momentum can be quick—especially in China’s markets, which are dominated by retail investors.