The coronavirus and the price of panic

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The Vix index reflects how worried the markets are. This week it tripled, amid concerns about the coronavirus outbreak. Stock prices have been in a tailspin since Monday, and although that might seem logical given what is happening, in fact it is odd, considering that the markets were climbing steadily before Monday. So what triggered this turnaround?

I had to travel by plane this week, and I was surprised to see the discomfort people were putting themselves through: they wore layers of different facemasks. Sandra Phlippen Chief Economist ABN AMRO

The reason for the turnaround is not in fact the slow but relentless spread of the virus around the world. No, the actual reason is how people are reacting to the virus: the price of panic, you might call it. That panic is evolving through four stages:

1. The movements of people and goods in China, at the epicentre of the outbreak, come to a literal standstill. The global demand for oil, tourism and dining out in local restaurants declines. For people outside China, this manifests itself primarily as cheaper petrol and fewer tourists in Amsterdam.

2. Many people stop working in China, the world’s manufacturing plant. The global supply chains of predominantly high-tech products and basic gear run dry. Many companies, previously not even aware that a small part of their product, somewhere deep in the pipeline, came from China, start to see shortages: the pipelines for many iPhones, airpods and toys begin in China, and now they are not being fed. Companies issue profit warnings, and investors become nervous. The fierce competition worldwide has forced many companies to reduce or eliminate their buffers in an attempt to cut their prices. Without those buffers, toys are no longer fed into the pipeline at its source, and that means more toys that do not find their way to the toyshops here. Smaller product volumes mean higher prices per product. This will be noticed in particular by shops such as Action, which source a large proportion of their products from China.

3. In the third stage, the one that hits investors hardest, governments start imposing measures to stop the virus from spreading. Italy has stopped all transport in the Lombardy region, which generates 21 per cent of the country’s GDP. As long as companies do not come to a full standstill, the damage is limited to spending in the tourism sector, in restaurants and in movie theatres. If the World Health Organization declares the outbreak to be a pandemic, more regions will be sealed off to prevent the virus from spreading further – regions that are much larger than the area of actual infection. That is what scares investors.

4. The next stage is the fear of fear. The wildest stories are doing the rounds on Facebook. The media are working overtime to churn out push notices and report every tiny fact and news item relating to the virus. As a result, private individuals are shutting themselves off from the outside world. I had to travel by plane this week, and I was surprised to see the discomfort people were putting themselves through: they wore layers of different facemasks, and refused to eat or drink at all during the flight, because they were scared. That is the price of panic. And even though infection numbers in China are dropping rapidly and the numbers of people who are recovering and returning to work are increasing just as fast, the world seems to be ignoring that.”

Every week Sandra writes a newspaper column for AD, which can also be read here.


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