LAWRIE WILLIAMS: Equities booming, gold and silver plunging but virus still spreading
Despite around 4,000 new cases of the Wuhan-centred corona virus reported in mainland China and reports of its incidence in some 26 countries and states outside the Chinese mainland an, in our view, hugely misguided rise in global equities markets has come about. Gold and silver have plunged as less risky assets have fallen out of favour. The euphoria in the markets has been generated by a feeling that the virus spread is only really a Chinese problem and the rest of the world has largely been, and will continue to be, spared.
But it is early days yet. The virus has only apparently been around for a month and a half and still the incidence seems to be accelerating in China. It has already comfortably surpassed the number of infections from the somewhat similar SARS virus outbreak from 2003 and is still spreading inside China despite some draconian measures to try and control it from the Chinese government. At the current rate of growth there could be close to 100,000 Chinese infected by the end of this month and the incidence outside the Chinese mainland is still rising too and at the current rate of growth will probably double by the month end. True the mortality rate is only around 2%, less than half that of the SARS virus, but it is hugely higher than for seasonal ‘flu, although the numbers of infections are still much lower.
The current rate of global economic growth is fragile at best and China, as the world’s second largest economy, and probably the world’s largest trading nation on its own, accounts for around 10% of global GDP. Thus a significant fall in its GDP growth, which is now virtually a certainty because of the domestic restrictions being imposed in an attempt to control virus incidence, will alone turn global GDP growth downwards and will probably mean a global recession occurring at least in the current quarter, and perhaps beyond.
According to an article in the New York Times, many leading infectious disease experts say the outbreak is likely to become a pandemic, defined as an ongoing epidemic on two or more continents, and that stringent anti-contagion restrictions may have come too late. “There’s no sign that it’s getting better,” said Leo Poon, division head of the public health laboratory sciences department at the University of Hong Kong. “We don’t see a pattern of decline, and that’s a problem.”
Nowhere in the world is immune to the knock-on effects of the virus, let alone the U.S. despite President Trump’s probably over-optimistic state of the union address. After all it is an election year! A number of major multinational companies have outsourced product manufacture to China, while many others rely on Chinese manufactured components and all this is bound to be interrupted by the cutting-off of travel between China and the rest of the world. Consumers will be wary of Chinese manufactured goods in case they carry traces of the virus, however unlikely. Such is human nature.
So, unless the virus spread is seen to be slowing, of which there’s no sign at the moment, the world will again start to worry about its impact on the economies of both affected and unaffected nations. Indeed the impact on China alone could be sufficient to tip the world into recession – the depth of which will likely depend on the longevity of the infection spread. Even on the best case scenario it seems unlikely that China can even start to recover until March or April. Oncethe world wakes up to this fact equities will turn down again and there will be a move back into safety, which will benefit gold and silver.
Towards the end of last year we came up with our predictions of likely precious metals prices and equities indexes in 2020. The Wuhan virus is likely to invalidate these and we plan to come up with new estimates this month as we get the chance to get a better handle on whether the virus is continuing to spread or not. Overall we suspect we will be upping our forecasts for gold and silver and perhaps downgrading our pgm and equities equities index predictions. Watch this space.
05 Feb 2020