“Buy on the sound of gunfire,” goes the old adage – the logic being that the best time to invest in a country is when its fortunes can’t seem to get any worse. It is hardly a guaranteed way to make money – had you called a bottom to the Syrian civil war in 2011 or 2014 and bought an apartment in downtown Damascus you might be getting a bit tired waiting to cash in on the end of hostilities. Nevertheless, it is worth asking whether coronavirus is going to present a buying opportunity in China, or indeed in world markets. As panic spread across the country early this week, Chinese stocks plummeted. Fidelity China Special Solutions plc and JP Morgan Chinese Investment Trust — which both offer UK investors a spread of companies quoted on the Chinese stock exchange, both plunged by nearly seven percent on Monday.
The outbreak could go one way or the other: it could evolve into an international crisis causing thousands of deaths around the world, or it could fizzle into nothing. But those with long memories may well come to the conclusion that the latter is the more likely scenario. SARS and H5N1 avian flu – both viral diseases which began in China and then spread to other countries – caused mass panic at one stage. In the case of Avian flu the World Health Organisation (WHO) issued a warning that it could lead to 50 million deaths worldwide – the number estimated to have been killed by the Spanish flu in 1919. Yet both disappeared from public consciousness just as quickly as they arrived.
So what happened to the Chinese stock market as they worked their course? When the first case of SARS was reported, on 16 November 2002, the China Shanghai Composite Index – like most global stock market indices at the time – was in a hole. It stood at 1463, down from 2200 in the summer of 2001. Between then and 1 March 2003, when the disease reached Hong Kong, the market actually rose to 1500. It continued to rise, reaching 1600 at the height of the panic in April of that year. Only then did it start to fall.
H5N1 Avian flu had been around in China since the mid 1990s, but had only managed to transmit to humans direct from poultry. The real panic began after the first case of human-to-human transmission was reported in Thailand on 27 January 2005. The China Shanghai Composite Index was then 1191. It fell to 1046 at the height of the panic when the disease spread to Indonesia on 21 July of that year. And then? The height of the panic turned out to be the bottom of the market. As avian flu failed to erupt into the feared pandemic and faded from the news, Chinese stock markets surged for the next two years, the index reaching 5570 in October 2007.
Obviously, infectious diseases are only one of many influences on stock markets. Even without the complication of coronavirus, China will remain in a trade war with the US, even if that, too, has failed to erupt as many feared it would. Matters have calmed considerably since the US and China came to an interim agreement in December. The same was true with SARS and Avian flu – there was plenty else going on with stockmarkets in the mid 2000s. The trough in global markets in March 2003 occurred just prior to the Iraq war, which coincided with SARS.
All the same, there is a lesson that stock markets can overreact to events which seem pretty seismic at the time but turn out to be minor tremors on the economic Richter scale. While there might be a temptation to seek out investments in companies which make face masks, there is a case for taking a bet on coronavirus turning out to have no greater bite than SARS or avian flu – and buying stuff which has been heavily discounted amid mass panic.