Canadian companies are bracing for further fallout from the spread of the new coronavirus as investor anxiety surrounding the cross-border threat intensifies around the globe.
The benchmark S&P/TSX Composite Index in Canada and the U.S. S&P 500 both had their worst trading days since October on Monday, adding to a sell-off in stocks around the world. The loonie lost ground against the U.S. dollar, and government bonds rallied.
The Chinese city of Wuhan, the epicentre of the illness, is under lockdown with no public transportation permitted in or out as authorities try to contain the virus.
Local officials have begun restricting movements in other regions, bringing travel and commerce to a standstill there. Global giants including Honda Motor Co. have begun evacuating workers.
Concern is also growing that the virus has spread quickly, both inside and outside China. The government has extended the Lunar New Year holiday until Feb. 2 in an effort to slow postholiday travel, and quarantined for 14 days people who had been to Wuhan.
Shares of Imax Corp., a Canadian film projection company listed on the New York Stock Exchange, fell further Monday after a drop last week. A big part of its business comes from China.
The openings of five of its films scheduled for last weekend have been postponed, Imax spokesperson Mark Jafar said. The entire theatre system in China is shut down, he said.
Shares in Canadian car parts maker Magna International Inc. also lost ground. The company employs some 18,750 people directly and through joint ventures in China, and is one of the most active Canadian companies in Wuhan’s Hubei province.
“We are certainly keeping a close eye on the situation in China,” Magna spokesman Scott Worden said. “Our health and safety experts along with medical advisers are continuing to monitor it. As of today, we are not aware of any impact to our regional operations.”
A federal laboratory has confirmed Canada’s first case of the new coronavirus and is investigating a second, both in Toronto, prompting Ontario to introduce new screening measures to protect paramedics responding to emergency calls. The province has an additional 19 patients with suspected cases of the new SARS-like coronavirus.
Awareness of the coronavirus and its potential impact is more acute in Canada than in many other nations. That’s likely because it has a similarity to severe acute respiratory syndrome (SARS), which killed 44 people in Canada in 2002 and 2003 – the most deaths outside Asia.
Health authorities insist Canada is much better prepared to deal with a pandemic than it was 17 years ago. But the stakes for the Canadian economy from any disruption today are much higher because of China’s rise as a global power.
China is so much bigger than it was, said National Bank of Canada chief economist Stéfane Marion, saying the country makes up 20 per cent to 25 per cent of the world’s manufacturing output while the number of Chinese people traveling by plane has gone from 73 million then to 611 million people a year now.
“Is there a precedent for that on this scale? No. We’ve never seen it,” Mr. Marion said. “It’s the first time we’re dealing with the shock, the epicenter being in China, like SARS, but China being a much larger component of the global supply chain.”
Companies directly in the line of fire include airlines and luxury retailers affected by Chinese travel restrictions. Air Canada’s stock has declined by 7.6 per cent over the past two trading days alone, while Canada Goose Holdings Inc., which recently opened new locations in mainland China and Hong Kong, has seen its share price drop by 6.6 per cent.
A dramatic reduction in air and road traffic during what is typically one of China’s busiest travel seasons has also weighed heavily on energy markets. Chinese demand for oil in January and February could drop by as much as 500 million barrels a day over normal levels, according to S&P Global Platts Analytics.
Global crude benchmarks have reacted with declines of nearly 10 per cent over the past week, which in turn has weighed on Canadian energy stocks.
Air Canada has been flying to China for more than 30 years, and offers dozens of trans-Pacific flights a week, including non-stop service to Beijing and Shanghai from Vancouver, Toronto and Montreal. Through a partner, Air Canada connects with Wuhan Tianhe International Airport.
“China is a significant component of Air Canada’s Asian strategy,” said John Gradek, a lecturer at McGill University and co-ordinator of the school’s Global Aviation Leadership Program. He said Air Canada learned from the SARS crisis of 2003, and stands ready to implement emergency measures such as ceasing flights should the federal government require them to do so.
“We are monitoring developments closely, but it is premature to say what impact the situation is having on our operations,” said Peter Fitzpatrick, a spokesman for Air Canada, which is waiving the rebooking fee for passengers flying to any of the three Chinese cities.
Investors are starting to factor the possibility of a pandemic into their decisions about what they will buy and at what price, David Rosenberg, head of Rosenberg Research and Associates, said in a note on Monday. “The odds are low, but still not trivial," he said. "Investors have this habit of shooting first and asking the questions later.”
On a broad market basis, however, North American investors are showing few signs of panic. Monday certainly had a material sell-off, but after a long stretch of virtually uninterrupted equity gains, the market was due for a pullback.
“The market was almost looking for an excuse for a correction,” said Jason Mann, chief investment officer at Toronto-based Edgehill Partners. Now that it has one, equity investors will likely remain fixated on how the virus develops.
“At a certain point, human emotion starts to take over, and that’s when you get plunges that are overdone relative to the actual underlying risk. We’re certainly not there yet,” Mr. Mann said.
That could quickly change with a significant acceleration of the virus’s spread around the world, or if the World Health Organization declares a global emergency.
Sherry Cooper, chief economist at Dominion Lending Centres, said as long as the number of cases of coronavirus in Canada remains small and the spread is well controlled, the economic impact will be minimal. The experience from SARS, she said, is that the more serious effects come when public fears start translating into widespread changes in consumer behaviour.
"Psychology is everything in this,” Dr. Cooper said. "We’d have to start to see a run on bottled water, self-quarantine, shutting down airports, that kind of thing, before it would be very scary from an economic perspective anywhere except China,” she said. “Once you get that, the thing can balloon very quickly.”