Lessons from how markets reacted to previous global health epidemics like SARS

Podcast Duration: 05:27

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George Santanya, a Spanish philosopher, had said, “Those who do not remember the past are condemned to repeat it.” The saying remains relevant, even today.

If we continue to operate like our ancestors, we are likely to make the same mistakes. The Covid-19 pandemic has given us an opportunity to test the ‘history repeats itself’ theory.

We are in the midst of a global crisis. But this is not the first crisis to hit the world, nor will it be the last. If we talk about the stock markets, just 12 years ago we were hit by an economic crisis of global scale.

However, it would be wrong to compare the Covid-19 pandemic with the Global Financial Crisis. The financial crisis had an impact on the livelihoods of people, but the Covid-19 crisis has affected livelihoods as well as physical well-being.

Secondly, a financial crisis can be largely mitigated through monetary stimulus. It affects household incomes. If adequate financial support is provided, a bulk of the demand recovers. But the same cannot be said for a health crisis.

Pandemics like Covid-19 affect consumer behaviour, which is harder to predict and manage. For instance, theatres may not witness an immediate rebound in the number of visitors. Watching a movie is a discretionary spend, just like many other activities. Many other activities may rebound, but people may not step out to watch a movie until their safety is guaranteed.

The current crisis can be compared to the SARS outbreak in 2003. Though there are differences, the SARS outbreak was the most similar to the Covid-19 outbreak. Both are infectious diseases and the financial and consumer reaction has been similar.

The world has witnessed multiple health crises before the SARS outbreak like the Spanish Flu and Cholera outbreak, but those were in the early 20th and 19th century, respectively and the nature of global economy was completely different. Even the financial markets were not as developed as they are today.

Though the nature, place of origin and the impact on people and economy of SARS and Covid-19 are similar, there are certain differences.

The biggest difference is the spread of the disease. Only 8000 people were infected by SARS and 774 had lost their lives. In the case of Covid-19, more than 60 lakh people have been infected and over 3.8 lakh have lost their lives. Cases are still rising in several countries.

The second difference is the size of the Chinese economy and its contribution to global trade. In 2003, China accounted for 8.7% of the global industrial production, but now it contributes 28.4% to global industrial production.

The SARS outbreak was mostly limited to Asia and the economic impact was largely felt in the continent. As with the Covid-19 outbreak, stocks related to travel and leisure were the first to decline during the SARS outbreak. Apparel and retail stocks too bore the brunt of the SARS outbreak. Every stock dependent on discretionary spends has witnessed strong selling pressure.

The performance of the affected stocks after the situation normalised can have important lessons for investors.

A word of caution. The actual impact of the Covid-19 pandemic is still not known. Cases are rising rapidly in many countries, including India. However, during the SARS outbreak, the demand had recovered swiftly after the spread of the disease was controlled.

Experts believe the situation may pan out similarly this time too. The impact on profits will likely be limited to two-three quarters. The premise is based on the assumption that in sectors like travel and leisure, people have just paused spending. During the SARS outbreak, airline stocks were severely affected but had become one of the best performing sectors as the outbreak subsided.

A swift recovery in discretionary stocks can be expected this time also. Once the situation normalises, the pent up demand will come out in the form of increased sales in the initial phase. Some sectors will benefit from the stimulus and various liquidity measures announced by the government, while some sectors will be beneficiaries of the pandemic.

The pharmaceutical sector is likely to be a direct beneficiary of the outbreak. In 2003, too, pharma stocks in China had surged due to an anticipated increase in demand.

The support provided by the government can be an important variable. In 2003, the Hong Kong government had announced a $1.5-billion relief package. Post stimulus, the Hong Kong equity market had outperformed all the markets in the world.

Similarly, governments around the world have been announcing relief measures for important sectors during the current crisis. The impact could be similar. Government measures may partially offset the impact of the crisis. However, not everything can be predicted. For instance, the modifications in the global supply chain. It is likely that substantial manufacturing will shift out of China.

India can be a major beneficiary of the shift out of China. If substantial manufacturing shifts to India, many companies could become wealth creators in the long term.

It can be said in conclusion that past experience teaches, the initial reaction is always severe, but recovery is equally quick. So, during asset allocation, invest the bulk of funds in equities, with a preference for transport, leisure and tourism as these sectors were the fastest to recover after the SARS outbreak.