In the past week, China’s Coronavirus as potentially our next black swan event weighed heavily on financial markets. Whilst it remains too early and difficult to quantify the precise impact, market analysts have estimated that if the problem is prolonged for another month, the financial impact could be, and that is a big ‘could be’, a 2% decline in Chinese growth to 4% or lower this year (with 1Q Chinese growth figures potentially dropping to 2% year-on-year, the lowest in decades, and down from 6% in the last quarter of 2019).
We also note that the comparison to impact felt from the 2003 SARs pandemic on financial markets should be considered cautiously as the estimated global economic loss of $40bn (or a 0.1% hit to global GDP) was at a time when Chinese share of global GDP was four times lower (4% versus the current 16%) and when China had as yet contributed to a third of that growth. In this week’s report, we take lessons from U.S companies which have reported recently during their earnings season. We note tourism, education, consumer goods and resources are key sectors of concern, as well as global growth to our portfolios.
What is the Coronavirus? According to the World Health Organization (WHO), the Coronavirus “is are a large family of viruses that cause illness ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS-CoV) and Severe Acute Respiratory Syndrome (SARS-CoV). A novel coronavirus (nCoV) is a new strain that has not been previously identified in humans”. In its ‘Statement on the second meeting of the International Health Regulations (2005) Emergency Committee regarding the outbreak of novel coronavirus (2019-nCoV)’, WHO noted “there are now 7711 confirmed and 12167 suspected cases throughout the country. Of the confirmed cases, 1370 are severe and 170 people have died. 124 people have recovered and been discharged from hospital… [on] the situation in other countries. There are now 83 cases in 18 countries. Of these, only 7 had no history of travel in China. There has been human-to-human transmission in 3 countries outside China”.
Lessons from U.S Companies reporting the impact… with the ongoing U.S reporting season continuing, a number of companies have commented on the virus:
(1) Car manufacturers: Jaguar and Land Rover parent Tata Motors management team noted the virus could hinder production in China and affect profits whilst Toyota Motors shut its Chinese factory till Feb 9.
(2) Airlines: Japan Airlines Co. highlighted a quarter of reservations for China flights were cancelled in the past 10 days.
(3) Consumer Goods: Electrolux noted the virus could have a material impact if its Chinese suppliers were further affected and it was implementing contingency plans.
(4) Retail: McDonald’s decided to close a few hundred of its ~3,300 stores in China but noted the overall impact on earnings thus far is minimal if the virus is contained in China. Conversely, Starbucks also closed more than half of its 4,300 Chinese stores and deferred providing earnings forecast but noted that it was a material impact but temporary. Remy Cointreau warned investors that a significant portion of revenue is derived from China, so an outbreak would result in a significant earnings downgrade.
(5) Semiconductors: SK Hynix, which operates a chip plant in Chinese city, Wuxi, noted production has not been disrupted but conceded that if the situation worsens, that it may.
(6) Apple Inc. decided to shut all official stores and corporate offices in mainland China until Feb 9, whilst Alphabet’s Google temporarily shut all offices in China, Hong Kong and Taiwan.
(7) Surgical masks: S. makers such as 3M and Owens & Minor are seeing surging demand in China and globally.
(8) Resorts: Walt Disney decided to shut its resorts and theme parks in Shanghai and Hong Kong.
(9) Hotels and booking platforms: Ctrip, China’s largest online booking platform, has seen more than 300,000 hotels on its platform agreeing to refunds on bookings between Jan. 22 and Feb. 8.
*This article is just a snippet of the full article sent to clients of BanyanTree Investment Group. Find out more about them here.
Investment Manager / Director at BanyanTree Investment Group
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