‘Lehman-Type’ Moment? Analysts Warn That Markets Are Too Complacent Over Coronavirus Risks

Kevin Mwanza
Written by Kevin Mwanza
Novavax coronavirus risks
Analysts warn that global markets may be underestimating the coronavirus risks and the potential financial fall-out from the fast-spreading virus. Passengers wear masks against coronavirus in a Hong Kong subway station, Jan. 22, 2020. (AP Photo/Kin Cheung)

Markets are underestimating the potential fall-out of the coronavirus outbreak, which is likely to be a “Lehman-type” moment for the economy globally, according to economic research firm AdMarco.

The death toll from the virus rose to almost 500 with more than 24,000 people confirmed to be infected, according to Chinese officials. The virus originated in the city of Wuhan.

A “Lehman-type” moment is a reference to the collapse of U.S. investment firm Lehman Brothers at the start of the global financial crisis in 2008. Lehman’s bankruptcy remains the largest ever, according to Investopedia.

Market analysts have pointed to the 2003 SARS outbreak as an indication of the short-term nature of any potential economic fallout.

In 2003, SARS resulted in the death of 800 people and it affected 8,000 people. It was estimated to have reduced growth in China by 1 percent while trimming 0.5 percent off growth across East Asia.

Patrick Perret-Green, head of research at AdMacro, told CNBC that the markets were being casual given the growth of China’s economy and the increase in its urban population and accessibility of travel since 2003.

He suggested that the cost of shutting down huge cities had not been properly priced in, given that 60 percent of China’s population is now in urban areas, compared to the 60 percent of people who were based in rural areas in 2003.

Perret-Green also points out that passenger journeys by air increased from 80 million to 660 million during that time period.

“Xinjiang province, 56 million people where enterprises are shut for another week, Shanghai, 24 million people, Hangzhou is another 11 million people,” said Perret-Green.

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In a note published last week, Perret-Green said that if the virus’s impact is felt for months as the World Health Organization predicts, it does not seem unreasonable that it could knock at least 1 percent off china’s growth and 0.5 off global growth.

However, USB Global Wealth Management head of equity and credit, Hartmut Issel, told CNBC last week that the Swiss lender does not expect the economic blowback to last beyond the first quarter of 2020. He said that the Chinese government has learned from similar past events and is more adept at containing the virus.