Are stock markets overreacting to the coronavirus threat? Possibly—but there is a real threat to companies in the travel sector.
On Sunday, officials brought up to five the total number of people in the U.S. diagnosed with the infectious new virus that started in the Chinese city of Wuhan and has led to travel bans and lockdowns across China. European nations are also trying to contain the spread of the disease.
Financial markets have taken a hit, threatening the momentum that has carried them since the start of the year. On Monday, European stocks fell around 2% in morning trading, led by airlines and China-oriented sectors such as resources and luxury. That followed the worst calendar week for global stocks since October.
The broader panic may be short-lived. Historical evidence from cases like the outbreak of ebola in 2014, the avian flu in 2009 or SARS in 2003 suggests there won’t be much long-term impact on the global economy or headline stock indexes.
There are still reasons for caution at the macroeconomic level: China’s infrastructure is much better than it was during the SARS epidemic in 2003, which could enable a faster spread of the coronavirus. Also, the crisis comes at an awkward time for the Chinese economy, whose weakness has already hit manufacturers across the world.
The real danger, though, is to companies in the travel and tourism industry, the earnings of which are directly impacted by travel bans and disruptions.
European airlines in particular are getting punished, given that they are a key gateway into and out of China. Shares in British Airways -owner IAG and Lufthansa are down 13% and 9%, respectively, since the start of last week.
Past performance shows that epidemics can drag on travel stocks for a long time: In the case of both the ebola and swine-flu panics, they underperformed broader cyclical stocks—those that are particularly affected by economic busts—by almost 4 percentage points over the following three months.
There is also reason for optimism. The most directly comparable outbreak—SARS, which is also a respiratory virus that spread from China—only appeared to weigh on broad travel stocks for a short period. Six months later, its effect wasn’t visible.
Yet investors may need to navigate carefully around firms in the travel and tourism industry with high exposure to the Asian market. In 2003, the operating profit of InterContinental, a hotel chain with a big Chinese business, dropped 55%, according to data provider FactSet—a result of both SARS and the Iraq war. China is generally a much bigger market for American companies than it was back then. U.S. travel companies that make a lot of revenue in the region now include Hawaiian Airlines and, to a lesser extent, United Airlines, as well as cruise lines like Royal Caribbean.
Health scares won’t challenge these firms’ business models. If history is any guide, though, they could be in for a bumpy year.
Write to Jon Sindreu at jon.sindreu@wsj.com
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2020-01-27 12:09:00Z
https://www.wsj.com/articles/coronavirus-is-no-small-threat-to-travel-stocks-11580126981
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