ALEX BRUMMER: Coronavirus threat could trigger more monetary easing

The chunky £150billion or so wiped off European share prices this week as the threat of the coronavirus loomed into view may at first have appeared to be an overreaction.

But as the death toll rises on fears of a severe impact on China’s economy and the rest of the world, the adverse response appears justified.

Luxury goods firms such as Britain’s Burberry and Bernard Arnault’s LVMH are directly in the firing line. 

In 2003, when SARS was rampant, Chinese consumers represented just 3 per cent of the high-end market. 

China is now responsible for one third of the sales in the sector. So a prolonged shutdown of Wuhan and air travel to and from China could be devastating.

The prosperity of luxury goods outlets might seem trivial in the context of the spreading disease, a surging death toll and the quarantine of overseas citizens who have been evacuated from Wuhan.

But it is a reminder of how the Chinese economy ballooned in importance in the first two decades of the 21st century. 

What is good for China has generally been good for the world in terms of output. The reverse also is true. 

The global economy has become far more intertwined and integrated since the SARS crisis. 

Chinese tourism at the start of the millennium was largely inbound, now it is outbound. Anyone doubting this should take a look at queues outside Selfridges during the seasonal sales.

Some 24,000 people were scheduled to fly on the cancelled British Airways flights between Heathrow and the Chinese hubs of Beijing and Shanghai. That is just one major global carrier, and for a limited period, which may yet have to be extended.

SARS offers a guide to how disease can affect economies. The 2003 outbreak was reckoned to have knocked 1 per cent off Chinese output and reduced global growth by £31billion. 

The main impact of such an event would be felt in the Pacific – not helpful as Britain goes global this week. 

The broader impact can be seen in commodity markets. Since the virus emerged, copper prices have fallen 8.5 per cent from their mid-January peak. 

Iron ore has tanked 6 per cent and Brent crude fallen 10 per cent. China’s manufacturing economy has an insatiable appetite for raw materials.

Containing the disease is the priority at present, both in China and across the globe, and doubtless big pharma is working to come up with a vaccine. 

The scaling-up of the Chinese economy since the last Asian virus scare means the economic and financial fallout this time could be far greater.

In Britain the ‘Boris bounce’ looks to have become a fact, with the Nationwide house price index up 1.9 per cent on an annual basis in January – the biggest rise since July 2018.

Lloyds Bank’s business barometer shows economic optimism at an 18-month high. The UK is on a rising tide which may dissuade the Bank of England’s interest rate setters to hold back on a cut today.

But a dip in an already weakening global economy, caused by the coronavirus, could yet trigger monetary easing.

Up-Hill task

Hargreaves Lansdown (HL) chief executive Chris Hill can expect awkward questions when he unveils half-year results tomorrow. 

The once-trusted investment platform saw redemptions of £440million from its multi-manager funds in the four months after Neil Woodford’s Equity Income fund was closed down.

Outflows reportedly have slowed since then. Now that the scale of losses for Woodford savers is known, close scrutiny is needed of HL’s investment process. How could it be that almost a quarter of its clients were exposed to Woodford?

Was a discounted management fee part of this? Why did HL continue to punt Woodford funds after questions were asked about its illiquid portfolio? How is it that profit margins at HL are so high?

Even if there are answers to these questions the case for the Financial Conduct Authority to broaden its inquiry to include HL is overwhelming.

Couch potatoes

Amazon and Deliveroo are both up in arms about the Competition and Markets Authority decision to postpone their love match.

The regulator, rightly, is taking the opportunity to test what kind of threat such a deal would have on competition in the market for online restaurant platforms and online grocery delivery in the UK, and the consequences for customers.

Good job!