FEATURE | There isn’t any playbook for this virus epidemic

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THEY say that the four most dangerous words in investing are “this time is different.” Taking that sage advice too literally with the coronavirus crisis looks like a mistake, though.

A server with a mask cleans a table at a restaurant in Fujisawa, Japan, Thursday. According to local businesses in the area, the number of visitors has dropped significantly since the outbreak of Covid-19.  AP

Epidemics are of course older than humanity and economic scares are as old as markets, but the confluence of a potential pandemic with today’s complicated and interconnected world is unique. Globalization has magnified local disruptions, government stimulus is already at once unthinkable levels and, both ominously and hopefully, technology is far more advanced than during the last truly global pandemic.

The SARS epidemic, while deadlier for those who caught it, provides a faulty template for understanding the Covid-19 outbreak because it was contained fairly quickly. The 1918 Spanish flu pandemic, with a lower fatality rate but global, occurred in a world before jet travel, widespread stock ownership or complex supply chains.

Yet many on Wall Street are still adhering to the SARS analogy, even as evidence mounts that the coronavirus outbreak will last longer and spread much farther. Expectations that it will remain centered in China, and that Chinese economic growth will get just a couple of percentage points knocked off it before a “V-shaped” recovery takes hold in the second quarter, appear extremely optimistic.

There realistically are two broad scenarios. One is that the virus is contained through herculean efforts by health workers in China, South Korea, Japan, Italy, Iran and wherever else it crops up. That will mean rolling disruptions for months. The scarier scenario is that the virus spreads globally anyway.

Epidemiologists simply don’t have enough data to even put a reasonable probability on that, said Alessandro Vespignani, an infectious-disease modeler at Northeastern University. Slower growth in the number of new cases in China, for example, could mean the tide there has turned, but there may still be many undetected cases. Moreover, there is no telling what may happen when China relaxes the unprecedented efforts it has put in place, including quarantining more than 60 million people.

Elsewhere, information is too patchy to get even a rough idea of how far the virus has spread. Last week, Friday morning, Italy had just three confirmed coronavirus cases. As of Monday, it had 229. “The next seven to 10 days will determine the fate of this epidemic,” said Mr. Vespignani.

Already the interruption of the supply chain from China and now South Korea is more significant than many appreciate and could worsen even if the virus is contained. Manufacturing has become increasingly dependent on sourcing components from suppliers, often with little spare inventory. The auto industry is a case in point: If even minor parts are missing because China-based suppliers are unable to make them, it could force assemblers around the world to halt production. China’s exports of car parts were worth $53 billion last year, according to customs data.

So far, close neighbors South Korea and Japan seem to have experienced the worst problems: Hyundai Motor and Nissan Motor have both had to halt production in their respective home countries. Others may be managing the problem by sacrificing their already slim margins. British manufacturer Jaguar Land Rover has resorted to flying components from China in suitcases, its boss told the Financial Times last week.

Volkswagen, the Western car manufacturer probably most dependent on cash flows from China, said Monday that most of its joint-venture factories were up and running again. Tellingly, though, it also warned that they faced a “slow national supply chain and logistics ramp-up.” Such problems could remain in the system for months.

And what if the virus goes global? While Chinese-style quarantines are tough to pull off in less-authoritarian societies, for better or worse, individuals’ reactions will have ripple effects. Hoarding, absenteeism and social avoidance may lift some sliver of the service economy but will damage most consumer-facing businesses like bricks-and-mortar retailers, travel stocks and restaurant chains.

The upshot of either coronavirus scenario, and especially the latter, may be far steeper market drops and at least local recessions. Governments used fiscal and monetary stimulus to mitigate the last economic crisis. This may be a tougher fight. Aside from the fact that the U.S. budget deficit is at a record in a boom time and interest rates world-wide are at or near record lows, pouring on stimulus just may not work very well.

Technology, meanwhile, is a double-edged sword. Jet travel and social media have made the spread of epidemics and “infodemics” faster, but they also allow people to weather a period of social avoidance. And when it comes to an eventual treatment, decoding the coronavirus genome and possibly being able to create a vaccine in record time based on that alone was science fiction when SARS hit 17 years ago. During the 1918 pandemic, penicillin didn’t even exist to fight secondary infections.

Investors scrambling for a coronavirus playbook may have to accept that we just don’t have one.

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