Don’t Panic. The Recent Market Drop Reflects a Sentiment and Not the Real Coronavirus Damage to the World Economy

The recent drop in the world's stock indexes by four to five % is associated with the "second wave" of the spreading of the coronavirus. The "lesions" caused by the spread of the virus went far beyond the epicentre - mainland China - and are affecting the heavily populated and industrial regions of Europe, especially Italy, and regions in Korea and Japan are also being affected. The fears that the effects of the virus on the world economy, world's production and trade are triggering investment risks. Such risks are in place and they are huge. But they are more wishful then the reality we have faced so far. The markets were seeking for a reason to perform a long expected correction of the overwhelmed assets. Investors are likely to overestimate the effect and consider future risks, which are already coming into focus on the world economy.

The International Monetary Fund (IMF) has recently lowered its outlook on the world's GDP only by 0.1% in 2020. This might be annoying but not catastrophic. Bloomberg sees the wold oil demand as possibly decreasing by three % this year, but oil prices have plummeted by 18% from the end of January. The mass hysteria over the virus may trigger further assets sell-off, suspension of investments in production, and a decline in production may be the result. This decline will come, not as a result of the virus, but as an outcome of the artificially exaggerated reaction to its potential danger. So, fabricated fears could lead to a real crisis. The danger always looks bigger through the eyes of fear.

It is really hard to make any projections in such circumstances, but the bright example of the "first wave" of the virus spreading may help to shed some light. The first wave pulled down markets not only in mainland China, but also in neighbouring countries. The Shanghai Composite index lost as much as 12% then. All-out efforts by the Chinese government to stop the virus from spreading further, lead to lower numbers of infected newbies, and the situation has, more or less, stabilised. The Chinese government is providing liquidity to the market, tax benefits and other stimulus to the local economy. The Shanghai Composite index has almost recovered its February losses and is above the pre-virus level of 3,000 points. Moreover, Chinese markets showed reluctance to the recent virus panic in Europe this week. China, whose economy has been affected the most by the virus outbreak could slowdown only to 5.6% from six % which was earlier expected, according to the IMF forecast.

With this in mind, the risky assets dynamic should be monitored. Their performance may reflect not only the real damage caused by the virus and its spreading, but also the sanity of the market players. The Chinese example shows that panic could be calmed down.

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