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Minimal Damage Expected From Coronavirus? ETF Areas to Benefit

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Global markets have been seesawing in recent weeks, depending on the news flow pertaining to coronavirus or Covid-19. Any spike in new cases is baffling markets, while signs of a slowdown in the spread of the disease are pushing markets higher.

How Fatal is the Virus for Global Growth?

There are different views on how damaging the virus is for global markets. Experts are forecasting that global economic growth in 2020 will drop 0.2% to 0.3%, while the U.S. Q1 growth could slow down 0.2% to 0.4%. Moody’s Analytics and Barclays expect the virus to hurt global GDP by 0.3% in 2020, while Oxford Economics forecasts a 0.2% reduction for the year. With the Chinese economy making up about 17% of global GDP currently, there is growing concern about the impact of it on global economy.

Recently, Goldman analysts did not seem too concerned about the virus scare and projected that it would hurt U.S. economic growth by up to 0.5 percentage points in the first quarter of 2020, but the economy would recover over the next two quarters. The global damage is likely to be as low as 0.1 percentage points over the full year.

White House economists also see limited economic impact from the outbreak as of now and a 0.2% slowdown in Q1 U.S. GDP. JPMorgan has chopped its first-quarter U.S. GDP forecast by 0.25%, Goldman Sachs by 0.40% and Moody’s by 0.45%.

What Will Happen to the Markets?

The World Bank estimates a more intensive pandemic to result in economic losses of roughly 5% of global GDP or more than $3 trillion. It also estimates that 0.5% of global GDP will be affected if the eruption turns out to be a weak pandemic like swine flu in 2009 (read: ETF Strategies to Mark as Virus Scare May Hit Global Growth).

Against this backdrop, investors should note that the Swine flu pandemic had failed to derail U.S. market momentum. In fact, U.S. markets, which were then recovering from an acute recession, added solid market gains, with SPDR S&P 500 ETF Trust SPY advancing about 23.8% in 2009.

Also, after a wavering market performance at the start of 2020, markets are now waiting with bated breath for a relief rally. So, minimal impact from coronavirus is likely to cause a surge in the markets in Q2. After all, the Fed is dovish and most of the U.S. economic indicators came in at upbeat of late (read: Are U.S. Assets Acting as Safe Havens? ETFs in Focus).

ETF Areas to Benefit

Energy – United States Brent Oil Fund LP (BNO)

Oil demand has suffered because of the virus scare. Expectations that key producers would enact deeper output cuts to make up for the slump in demand caused by coronavirus in China (the world’s second-largest crude consumer) are likely to boost oil prices. The slight ease in virus threat boosted BNO by 3.3% on Feb 12.

Casino – VanEck Vectors Gaming ETF (BJK)

Many U.S. casino companies like Wynn (WYNN - Free Report) , Las Vegas Sands LVS and MGM Resorts MGM have considerable exposure to BJK. Along with research houses like Bank of America, we believe that limited effect of the virus will boost the beaten-down fund. The reopening of casinos should work for the fund. Bank of America’s comment boosted BJK shares by 2.5% on Feb 12.

Airlines – U.S. Global Jets ETF (JETS)

Several airlines have now canceled China routes, thanks to travel restrictions. Thus, this is yet another area that would enjoy a relief rally. This is especially true given the mixed-to-upbeat fourth-quarter earnings season for the industry. Airlines companies belong to a favorable Zacks industry (placed at the top 13% of 250+ industries) (read: Earnings or Coronavirus: What Will Impact Airlines ETF Ahead?).

Communication Services – Communication Services Select Sector SPDR ETF (XLC)

As the market gains momentum, cyclical stocks should pick up. The rapid adoption of satellite broadband services, arrival of direct-to-home TV offerings and advancement of digital technology are likely to drive the communication space. The fund is heavy with stocks like Facebook, Alphabet Class A, Alphabet Class C and Netflix. It has a Zacks Rank #2 (read: These 4 Sector ETFs Look Attractive in February).

Growth SPDR Portfolio S&P 500 Growth ETF(SPYG)

In a recovering market, growth stocks are likely to fly higher. This Zacks Rank #1 fund measures the performance of the large-capitalization growth sector in the U.S. equity market (read: Market Scales New High: Top-Ranked Growth ETFs to Buy).

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