Coronavirus Outbreak Poses Grave Implications for the Chinese Economy but Is Positive for Biotech Stocks – a Real-Life Resident Evil Saga in the Making?

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Panic seems to be brewing in medical and official quarters throughout the globe as the coronavirus outbreak seems to be worsening with the passage of time. Today, we will examine the hardcore facts related to this viral outbreak and, by extension, gain insight into the up-thrust potential for key biotech stocks. We will also examine the impact of this outbreak on the wider Chinese economy.

The level of threat posed by the coronavirus

According to the World Health Organization (WHO), the coronavirus traces its origin to a family of viruses that cause illnesses ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS).

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These viruses are communicable between animals and people. For example, SARS was believed to have been transmitted from civet cats to humans while MERS was communicated from a specific type of camel.

A novel coronavirus, identified by Chinese authorities on the 7th of January – currently named 2019-nCoV – is a new strain that had not been previously identified in humans.

The following infographic sheds crucial light on pertinent information related to the coronavirus:

Coronavirus

Source

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As you can see in the infographic, the virus purportedly originated in a seafood wholesale market in China’s Wuhan province. As of the 24th of January 2020, this viral infection has been found in 846 persons and has resulted in 26 fatalities. This means that the death rate associated with the infection currently stands at 3.07 percent. For reference, the SARS epidemic in 2002-2003 ultimately bore a death rate of 9.35 percent – 790 deaths in 8,445 cases. Nonetheless, it should be noted that the 2019-nCoV outbreak is presently only in its third week and that this figure may yet increase.

The WHO has officially recognized coronavirus as a medical emergency but noted that it is still too early to raise the global threat level. Nonetheless, China seems to be feeling the brunt of the impact as millions of people have been hampered from hitting the road on the eve of the lunar new year. As an illustration, the Chinese authorities have placed 20 million people under a lockdown and the public new year celebrations have been cancelled. Shanghai Disney has also announced a temporary closure. Moreover, numerous cinemas have cancelled the screening of new movies slated for release during the new year holidays.

The Umbrella Corporation angle

Please note that no official notification has been received for any link between the coronavirus outbreak and the content that I’m about to share in this section. Consequently, I will not interpret any information but simply state facts and the readers are free to draw their own conclusions.

A maximum-security biolab exists in Wuhan and was the subject of an article by the Nature publication in 2017. The lab is part of a plan to build between five and seven biosafety level-4 (BSL-4) labs across the Chinese mainland by 2025 in order to study some of the most dangerous pathogens. Please note that the BSL-4 designation is reserved for the highest level of biocontainment which includes an air filtration system along with water and waste treatment mechanisms. The facility itself was built at a cost of $44 million and can withstand magnitude-7 earthquakes.

However, what makes this facility a subject of interest is the fact that, according to the Nature article, precedents exist in China of such leaks:

But worries surround the Chinese lab, too. The SARS virus has escaped from high-level containment facilities in Beijing multiple times, notes Richard Ebright, a molecular biologist at Rutgers University in Piscataway, New Jersey.

I would like to reiterate that no official link exists at this point that connects the coronavirus to this facility in Wuhan. However, this angle does merit continued vigilance, ergo, the reason for its inclusion here.

Gauging the up-thrust potential for key biotech equities

In order to gauge the upside potential for biotech stocks on the back of the coronavirus outbreak, I will examine the performance of one of the leading biotech ETFs – the iShares NASDAQ Biotechnology Index (NASDAQ:IBB) – during the 2002 to 2003 SARS outbreak.

As you can see from the chart above, the ETF registered gains of 30.47 percent between the 8th of November 2002 and the 27th of June 2003. This nearly 7-month period constituted the peak panic period related to the SARS epidemic. For reference, the S&P500 index registered gains of 11.42 percent during the same period. This, in turn, translates to an alpha of 19.05 percent relative to the S&P500.

However, a few caveats should be noted here. First, the biotech sector usually outperforms the S&P500 index but the margin of outperformance is notable here. Second, the 2002-2003 period is characterized as an early bull market following the dotcom bust. The current market, however, is in a rather stale bullish phase during the longest economic expansion in recorded history. Consequently, the level of euphoria in today’s market is bound to be less than the one found in the market of early 2000s. Third, the impact of coronavirus, as it stands today, is substantially less than the one produced by the SARS epidemic.

An infographic pertaining to the impact of the SARS virus:

Europe: 10 countries (38) Canada (238) Russian Fed. (1) Mongolia (9) Mongolia (9) Korea Rep. (3) USA (70) China (5328) Macao (1) Kuwait (1) Hong Kong (1755) Taiwan (688) India (3) Colombia (1) Viet Nam (63) Malaysia (5) Indonesia (2) Singapore (206) Brazil (3) Philippines (14) Thailand (9) South Africa (1) South Africa (1) Australia (5) Outbreaks before 15 March global alert. New Zealand (1) Outbreaks after 15 March global alert.

Nonetheless, should the impact of coronavirus start approaching the one produced by SARS, it is reasonable to expect a substantial up-thrust in the biotech sector.

Now we will examine some of the key beneficiaries in the biotech space.

Novavax, Inc. (NASDAQ:NVAX) is developing several vaccine candidates targeting seasonal influenza, respiratory syncytial virus (RSV) and Ebola. The company successfully developed a vaccine for the MERS virus in 2013 and, therefore, its successful history with this family of viruses makes it a potential winner in case of a coronavirus epidemic.

Moderna, Inc. (NASDAQ:MRNA) is currently developing several vaccines based on the messenger-RNA (mRNA) in order to cure respiratory syndromes and flu. The company is currently working with several government health agencies in the United States in order to develop a vaccine for the coronavirus (2019-nCoV).

NanoViricides, Inc. (NYSEAMERICAN:NNVC) is currently developing nanotechnology-based anti-viral vaccines that target several infectious diseases including the influenza. The company has also worked on developing treatments for MERS and Ebola which makes it a prime candidate for successfully developing a coronavirus vaccine.

Broader implications of the coronavirus for the Chinese economy

Of course, the coronavirus outbreak could not have come at a worst time for Beijing. As mentioned earlier, this is the peak travel season throughout Asia due to the lunar new year. Moreover, the Chinese economy has been battered by the 18-month long U.S. – China trade war which saw numerous rounds of retaliatory tariffs imposed by both countries on each other’s products. Recently, China posted the weakest annual growth in nearly 30 years due to the damaging effects of the trade war.

In this atmosphere, a coronavirus epidemic would severely impact consumer and business confidence which, in turn, would limit the efficacy of Beijing’s massive stimulus measures designed to kick-start the ailing economy. It would also curtail the country’s services sector that now accounts for around 52 percent of the economy. Bear in mind that SARS also had a wider impact on the country’s economy. As an illustration, China's annual growth rate slumped to 9.1 percent in the second quarter of 2003, down from the growth of 11.1 percent in the first quarter of that year, according to the brokerage firm Macquarie Group.

Despite a concerted push by the Trump administration to reduce America’s reliance on China in general and the tech sector’s in particular, the Asian giant remains a key node in U.S. industrial and tech supply chains. Consequently, it is reasonable to expect material downside for U.S. equities, with the tech sector leading the fall, in the event of a significant downgrade in China’s economic performance as a result of a coronavirus pandemic.

What do you think about the implications of the coronavirus? Please share your thoughts in the comments section below.

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