Strategy Note /
Asia

Coronavirus: Commodity prices hit as fears grow more global

  • As the number of Wuhan coronavirus cases increase, concerns turn more global

  • We show net fuel export/(import) exposure across EMs and provide updated statistics on equity performance and valuation

  • The tussle in markets ahead is between the risk of economic disruption and the counter-stimulus in economic policy

Coronavirus: Commodity prices hit as fears grow more global
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
3 February 2020
Published byTellimer Research

As the number of Wuhan coronavirus cases increase, concerns turn more global. Commodity price declines, e.g. the 15% drop in Brent crude oil year to date, reflect this. 

Below we depict net fuel export/ (import) exposure across emerging and frontier markets and provide updated statistics on equity market performance and valuation. We have previously discussed before how the Wuhan Coronavirus may impact tourism across the emerging and frontier markets – see Coronavirus: UAE case a warning for global tourism, 29 January 2020.

The tussle in markets ahead is between the risk of economic disruption and the counter-stimulus in economic policy (e.g. even looser central bank liquidity), or measures like further output cuts from OPEC+. Until, at least, the rate of increase of confirmed cases decelerates or more evidence emerges of a low death rate, fear is likely to dominate greed. We, of course, have no predictive power on the spread of the coronavirus.

Apart from immediate economic disruption, medium-term political disruption is possible too if the healthcare response by governments is deemed insufficient either by their own populations or by their geopolitical rivals. We note the increasing references to China's autocratic government in mainstream western media coverage as a reason why the coronavirus was not contained earlier. What happens in the event of a full-blown pandemic if the healthcare response in some countries is deemed so inadequate that it provides a pretext for external intervention by militarily stronger, richer neighbours (i.e. more than simply restricting travel from the "problem" country)?

2003 SARS comparisons (which suggest market weakness is a buying opportunity) are likely the best that investors can look to for guidance, but they have serious shortcomings: compared to 2003, China is a much bigger percentage of the global economy, the Chinese economy is now more dependent on domestic consumption, Chinese tourism is a far greater share of the global market, global air travel is more widespread, equity markets rallied prior to the Wuhan outbreak (they declined prior to SARS), China is a bigger percentage of global (particularly emerging) equity markets, and passive funds drive a greater share of flows.

 

Oil import and export exposure across emerging and frontier markets

Most emerging and frontier markets have declined and de-rated year to date

Source: Bloomberg