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COVID-19 and the global economy

How will the new coronavirus affect your clients’ investments?


The early news reports, in December 2019, talked about a mysterious viral pneumonia affecting a small number of patients in Wuhan, China. Few investors noticed. But by January, when China launched an unparalleled quarantine effort to combat rapidly rising infection numbers, everyone was paying attention. Officially named COVID-19 in February, the new coronavirus was front-page news, day after day. 

Naturally, investors started wondering how this potential pandemic would affect the global economy and their own portfolios. Advisors fielding questions from clients likely looked to the past to get a sense of how markets have reacted to similar events, but a famous adage sometimes attributed to Mark Twain applies here: “History doesn’t repeat itself, but it often rhymes.” 

Then and now

“The hard truth is that, while there are some similarities to viral outbreaks in the past, there are no good parallels to what we are experiencing today,” says Philip Petursson, Manulife’s Chief Investment Strategist and Head of Capital Markets Research. “In most reports I have read, the immediate comparison to this coronavirus is the SARS outbreak of 2003. Yet, we would argue the economic and market comparisons are far from perfect.”

When SARS started its spread, the S&P 500 Index was forming a double bottom off the tech-wreck bear market, and investors were focused on the buildup to U.S. military action in Iraq. Valuations were at about 18.5 times trailing earnings, and earnings growth was accelerating. In contrast, in early 2020 the S&P 500 Index was close to an all-time high, with valuations near 22 times trailing earnings and declining earnings growth year over year (see Chart 1).

Chart 1

S&P 500 index then and now index level vs. earnings per share


From emerging to developed

Another difference between then and now is that China was not as important to the global economy in 2003 as it is today. At the time of SARS, China’s economy was the sixth-largest with an 8.7% share; today, it is the second-largest with a 19.3% share. That means a decline in export volumes in China will have a much greater impact on the global economy – and, with increasingly globally integrated supply chains, more individual companies in other countries now depend on Chinese exports. 

So, while the experience of SARS can provide some insight into the potential impact of COVID-19, there may be closer parallels in crises unrelated to health, Petursson suggests. For example, the polar vortex of 2014 – a period of extreme cold and record snowfall that affected an estimated 200 million people in North America – cancelled flights, closed schools and kept people at home. The resulting impacts on consumption, services and manufacturing may provide a window into what could follow in the wake of the new coronavirus.

“The extreme weather conditions of 2014 contributed to weaker-than-expected [U.S.] GDP growth for the first quarter of 2014,” says Petursson. “We would suggest that the Chinese economy could see a similar drop in economic activity. We believe negative economic growth for the first quarter, on a quarter-over-quarter basis, for China – which would represent a significant deceleration of activity for Q1 – is a realistic outcome.”

However, Petursson points out, the U.S. economy saw a pronounced rebound from the effects of the polar vortex in the second quarter of 2014 (see Chart 2). In China, some demand will be lost forever – for example, cancelled travel plans. But some will be pent-up and should drive an economic rebound there, too, he adds. 

Chart 2

US GSP QoQ SAA 2002 to current

Behavioural disruption 

 As a result, the emergence of the virus will likely delay the reacceleration of manufacturing in China. Countries that are most sensitive to what happens in China, including Japan, South Korea and Germany, will probably see their economic growth weaken. And, just as the virus has affected the Chinese services sector, if it continues to spread it may have an impact on the global services sector — which matters to global economic growth. 

 As is often the case, the magnitude of these effects depends on how much COVID-19 changes people’s behaviour and how companies around the world react. It will be important to watch consumer confidence and business confidence closely in the months to come. However, investors need to remember that past epidemics have created attractive opportunities to buy good-quality long-term holdings at a discount. 

Talking to clients about COVID-19


  • New viruses spark panic, but economic growth has always recovered post-epidemic.
  • Other economic shocks, too, like the 2014 polar vortex, have been followed by rebounds.
  • Consider a defensive portfolio and, if high valuations drop, look for buying opportunities.

For now, from Petursson’s perspective, the best recommendation for clients is to keep an eye on fundamentals and “stay the course.” 

For more information and to hear more of the team’s views, listen to episode 29 of Investments Unplugged: “Coronavirus, an economically disruptive, not destructive, event,” available at https://retail.manulifeinvestmentmgmt.com/ca/en/viewpoints/capital-markets-strategy/investments-unplugged-with-philip-petursson



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