Weighing up potential market impacts from the coronavirus

Insights

Weighing up potential market impacts from the coronavirus

As the virus outbreak spreads well beyond China, it is hard to forecast exactly what the economic impact will be, but it’s safe to say that consumption and supply will be significantly affected

The coronavirus is a clear shock to the world economy. In its nature the disease is very different from the likes of SARS and swine flu in that the transmission rate is far higher and mercifully the death rate is much lower. The other clear difference is that the infection has now clearly left Asia. Up until the weekend Europeans and people in the US could be comfortable that this was a China issue with selective outbreaks in the rest of Asia. Now, with the developments in Korea and most critically in Italy over the weekend, this comfortable view of markets has been shattered with the S&P close to 7% off its highs of only five sessions ago1.

Where do we think the coronavirus will develop? Being a non-medical and non-public health person it is very difficult to forecast. I find it hard to believe we will not have a more significant number of cases. The fact there have been school holidays throughout Europe, with many families vacationing across the continent, just exacerbates this. So, the question is how successful the authorities will be at containing any outbreak.

I am encouraged at the success of Singapore in limiting cases and experiencing no deaths. Of course, as we look ahead, we think the coronavirus outbreak will die away – the heat of summer should bring a relief in transmission rates, but even before then successful containment should see the disease incidence taper. Looking at Chinese statistics (assuming their accuracy) we can already see the aggressive containment strategy producing results. There will be a time when this crisis is over, and it should be in the coming months.

So, what will the economic impact be? So far we see two clear impacts: lost consumption and lost supply. Looking at the evidence from China, as the disease becomes the dominant factor in people’s thinking consumption falls. An Adidas market update last week stated that its Chinese business had fallen by 85%2 – at that level there is little mileage in analysts trying to second guess the numbers. It is a clear disaster, but it is temporary. In a few months, and certainly before the end of this year, we will likely be back on trend. However, I suspect that a significant portion of the drop in consumption will be lost forever. While we might still ultimately replace a smartphone, we are unlikely to buy that new spring season outfit.

The second element is supply disruption, where we are seeing clear evidence of critical component shortages leading to underproduction. Apple already confessed to this last week3, and we will hear much more. Again, if inventory is unavailable it will miss consumer demand and a portion will ultimately be lost. In some industries where inventory cycles are the norm, we will enter a period of inventory adjustment. The depth of the down cycle and how global this event becomes will determine the required period of adjustment. It looks likely that we could have another “industrial recession” driven by the coronavirus, similar to the 2012 euro crisis, the 2014-15 oil price collapse, and the 2018-19 trade dispute-driven slowdown. None of these events triggered an overall recession and given the temporary nature of the coronavirus event we would not anticipate one this time – though in the case of Japan and perhaps Germany we might see one, albeit mild.

Companies will experience a period of negative earnings revisions which will continue to negatively impact the market even if its capacity to shock becomes limited. While we have not made a formal estimate, it is possible we will see earnings downgrades of double figures. This was the impact of the aforementioned viral slowdowns and would be enough to remove the earnings growth that was forecast this year.

Another way of thinking about this is that the slow growth environment the world economy has experienced since the global financial crisis (GFC) will continue. During that period the average company has struggled to grow earnings. Figure 1, for example, shows the development of global earnings relative to the tech sector over that period.

Figure 1: Companies last 12 months earning (1988-2019)

Weighting up potential market impacts from coronvirus figure

Source: Goldman Sachs, December 2019.

Coronavirus as an event means this trend will continue in 2020. Of course, it is not just technology businesses that fit this category, but also medical tech and quality growth businesses that can deliver in all economic environments. Earlier this week Mastercard issued 2 Adidas a profit warning4, reducing its revenue growth forecast by two to three percentage points. Checking the company’s performance during the GFC, even with the headwind of a strong dollar it sustained revenue growth of 3%5. Good businesses outperform and consolidate their competitive position during tougher times.

In the medium term one of the clear implications that coronavirus brings is further pressure to diversify or even shorten supply chains. For the past 30 years the successful model for a western business has been to lengthen supply chains to access cheaper inputs in low wage economies, of which China has been the poster child. President Trump has provided political resistance to this; coronavirus adds a focus on security of supply.

Over the next decade as the use of artificial intelligence increases, the frequency with which companies make, for example, demand forecasts will rise, and the way businesses will take advantage of these insights is with a shorter, more agile supply chain with automation helping to offset the resultant cost pressures.

Finally, while the above discussion provides a framework for thinking about the impact of coronavirus, it is a fast-changing situation. I hope you all stay safe.

20 February 2020
Neil Robson
Neil Robson
Head of Global Equities
Share article
Key topics
Related topics
Listen on Stitcher badge
Share article
Key topics
Related topics

PDF

Weighing up potential market impacts from the coronavirus

Sources:
1. Bloomberg, 27 February 2020
2. Adidas says business activity in China has tanked roughly 85% due to coronavirus, CNBC, 19 February 2020
3. Apple warns of coronavirus causing iPhone shortages, The Guardian, 17 February 2020.
4. Mastercard cuts revenue outlook on coronavirus impact, FT.com, 25 February 2020
5. Visa, MasterCard cut costs as revenue growth slows, Budapest Business Journal, 16 February 2009

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

Related Insights

2 October 2024

Natalia Luna

Senior Thematic Investment Analyst, Global Research

Pauline Grange

Portfolio Manager

US election: the Inflation Reduction Act (IRA) and the risk of repeal - Implications for investors

The multi decade transition to green energy should remain intact. We explain why and highlight companies set to benefit.
Watch time - 10 mins
23 September 2024

Albertine Pegrum-Haram

Senior Associate, Responsible Investment

Claire Robbs

CFA, Credit Analyst, Investment Grade Credit Research

Robert Whitworth

CFA, Equity Analyst, Fundamental Research Team

Can the demand for critical minerals be met responsibly?

A secure and consistent supply of critical minerals is fundamental to the energy transition and to achieving net-zero, but demand is putting pressure on supply chains and costs, and risks polarising sentiment around the energy transition.
Read time - 7 min
16 September 2024

Shengsheng Zhang

Director, Quant Strategist

Yu-Ting Fu

Associate, Corporate Governance Analyst

How does board gender diversity affect stock risk?

Companies with insufficient board gender diversity have higher idiosyncratic risk, so how can portfolio managers go about mitigating this?
Read time - 8 min
2 October 2024

Natalia Luna

Senior Thematic Investment Analyst, Global Research

Pauline Grange

Portfolio Manager

US election: the Inflation Reduction Act (IRA) and the risk of repeal - Implications for investors

The multi decade transition to green energy should remain intact. We explain why and highlight companies set to benefit.
Watch time - 10 mins
30 September 2024

Fixed Income Desk

In Credit - Weekly Snapshot

In Credit Weekly Snapshot – September 2024

Our fixed income team provide their weekly snapshot of market events.
30 September 2024

Steven Bell

Chief Economist, EMEA

Will £ Hit $1.50 in 2025?

Signs indicate sterling’s ascent has begun in earnest. How soon before it reaches $1.50?
Watch time - 4 min
true
true

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Our Capabilities

We offer a broad range of actively managed investment strategies and solutions covering global, regional and domestic markets and asset classes.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

Woman listens to music through headphones
Play Video

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium