Shanghai Market
A pedestrian wearing a protective mask walks along an elevated walkway as an electronic ticker displays stock figures in Pudong's Lujiazui Financial District in Shanghai, China, on Friday, March 6, 2020. While infections in the rest of the world accelerate, the coronavirus epidemic is showing signs of easing at its center -- China -- with new cases slowing dramatically and recoveries gathering pace. Image Credit: Bloomberg

Dubai: As markets melt in the face of a growing contagion, stocks in epicentre China may be hinting at how global investors will react next.

A gauge of stocks in Shanghai and Shenzhen had jumped 14 per cent in just over a month to close at a two-year high last week – a sharp turnaround from the direness seen just a month ago in the East Asian nation.

The initial outbreak had then shut factories across China with cities in the mainland quarantined, and the stock markets were hurt by the most savage selling in years – a selloff that currently sounds all too familiar for investors worldwide.

The severity of the selling seen then in the country that is still the most affected by the virus outbreak, is similar to what investors have been witnessing the last couple of weeks in markets globally - the worst decline seen since the 2008 financial crisis.

The top indices on Wall Street and elsewhere, which dropped over 10 per cent last week and caused nearly $5 trillion of global stock market wealth to perish, fell deeper in the red this week.

Although these benchmarks remain in negative territory - far below its record close in mid-February - and signs of an economic fallout have gradually started to appear, there are indications still of a global market recovery being imminent.

Rebound nearing?

While the market rally seen in China does raise chances of a near term bounce back among other indices, a plateauing in the number of confirmed virus cases - according to data from the John Hopkins Center for Systems Science and Engineering (CSSE) - too aids this optimism.

Even though China has stated that the number of deaths there from the outbreak has surpassed 3,000, the number of total recovered cases has continued to rise.

“The data would seem to suggest we are creeping (albeit slowly) toward the end game in this medical saga, as containment and prevention initiatives begin to show positive results,” said Simon Ballard, Chief Economist at First Abu Dhabi Bank.

This certainly does not support, in our opinion, the notion that we are still deteriorating to a point that warrants a race to the bottom in global rates, Ballard added.

Not a past repeat

Also, if past is prologue, optimists still say the swooning global stock markets will recover their health fairly soon and resume moving higher.

The SARS epidemic of 2003 also triggered a global stock market selloff, but that downturn didn’t develop into a worldwide bear (continued selling) market. On the contrary, the selloff produced a buying opportunity that would reward investors handsomely over the following four years.

This week’s epidemic-triggered stock market drop is not identical to the downturn of 2003, but it could provide a similarly rewarding buying opportunity.

Most major benchmarks bottomed that March, just a few weeks after the SARS epidemic became a Time magazine cover story, but analysts today remain of the view that markets are currently nowhere near bottoming out.

Another good news about the latest epidemic is that it appears to be less lethal than severe acute respiratory syndrome (SARS) virus. The coronavirus kills about 3 out of every 100 people it infects, whereas the SARS epidemic of 2003 killed nearly 10 out of every 100 infected people.

So while China’s markets further defy gravity by rallying on, the rest of the world can only look on with wonder whether a rebound is nearing or fear it will further crash down - although signs indicate the former.