Should Investors Be Fearful Of The Coronavirus?

This year’s Chinese New Year has been rather subdued. Despite the festivities, my thought kept turning to the Coronavirus outbreak which originated in the central China city of Wuhan. The virus has infected people across China cities and spread to multiple countries in Asia, North America and Europe. Latest figures today showed that the death toll has risen to over to 700 people, with more than 34,800 cases confirmed. Indeed, the situation is serious and worrying. And for investors, this is turning out to be the black swan event in 2020 that no one saw coming.

When China sneezes, the world catches a cold

As authorities in China race to contain the spread of Coronavirus, investors are bracing for an economic fallout. The immediate and most significant economic impact is certainly in China, where most of the infections are being reported. But given the importance of China in global growth as well as in global company revenue, any slowdown in the country will, in turn, weigh on the world economy.

Consider this. China has been the main growth driver worldwide, with the International Monetary Fund estimates that the country alone accounted for 39% of global economic expansion in 2019. In that year, China’s full-year GDP growth was 6.1%. Some analysts and economists are now cutting their China GDP forecasts for 2020 amid the outbreak, predicting growth rates to drop below 6.0%, as Chinese consumption plummets, offices and factories are closed, and supply chains are disrupted. Clearly, if China’s economic slowdown deepens, the rippling effects will be felt across the world.   

Companies warn on the economic cost of plunging Chinese consumption

Faced with shuttered stores and empty streets, big consumer brands and restaurant operators are nervous about the impact of the Coronavirus on their business.

Nike Inc (NYSE: NKE) shares fell 3% when it said that the Coronavirus would have a “material impact” on its China operations. China is Nike’s biggest growth market. The company said it has temporarily closed half of its Nike-owned stores and is opening its other stores in China for fewer hours.  

Meanwhile, China’s largest restaurant company, Yum China Holdings Inc (NYSE: YUMC) warned that it could report an operating loss in the first quarter and take a significant hit to sales and productivity due to the Coronavirus outbreak after it was forced to shut nearly a third of its stores.

The travel and hospitality industry has also been badly impacted. Several countries have issued travel warnings about China; some airlines have even suspended flights to China and international hotel chain have been offering refunds.

Cathay Pacific Airways Ltd (HKG: 0293) has asked all of its 27,000 employees to take three weeks of unpaid leave over the coming months, as it reels from the impact of the Coronavirus outbreak. In a taped video recording, its CEO, Augustus Tang Kin-wing said that the recent Lunar New Year holiday, normally one of the most profitable times of the year for the airline, was “one of the most difficult …we have ever had”. He acknowledged a “large decline in the number of visitors” to and through Hong Kong, mainland China, and many other countries around the world.

Separately, the Walt Disney Co(NYSE: DIS) announced that it is expecting to take a US$175 million hit from the Coronavirus outbreak if its Hong Kong and Shanghai Disney parks remain closed for two months. Disney’s CFO, Christine McCarthy, explained in the latest earnings call that unfortunately “the current closure is taking place during the quarter in which we (the company) typically sees strong attendance and occupancy levels due to the timing of the Chinese New Year holiday.”

Supply chain disruptions cause production and shipment delays

And beyond that, there is growing concern about disruptions to integrated international supply chains. Many countries and companies around the world not only depend on China to buy their products but to supply them materials and parts to make goods for exports as well. Now that status quo is under threat after much of China was shut down, in efforts to contain the virus outbreak.

Hyundai Motor Co (KRX: 005380) announced that it had been forced to suspend production at its giant Ulsan complex, hamstrung by a lack of parts with the Coronavirus outbreak crippling China’s industrial output. The impact on Hyundai will be eye-watering, with analysts estimating a five-day South Korean shutdown to cost the firm at least six hundred billion won (US$500 million).

Meanwhile, Nintendo Co., Ltd (TYO: 7974) has informed consumers in its home market of Japan that production and shipments of the Switch console and accessories will experience delays due to the effects of the Coronavirus. Most switch consoles are said to be built by Foxconn Technology Co Ltd (TPE: 2354), which is keeping its Chinese factories shut until February 10th at the earliest.

As most investors know, Foxconn is the largest maker of iPhones.  Half of the world’s iPhones are said to be made at Foxconn’s “iPhone City” in Zhengzhou, China, whereas many as 350,000 people work side-by-side to assemble Apple Inc.’s (NASDAQ: AAPL) most profitable product. Foxconn’s ability to reopen its factory will be dependent upon approval from central and provincial governments. A length stoppage could substantially disrupt Apple from shipping devices to customers.

How the stock market has performed during past viral outbreaks

Without a doubt, these are troubling times for investors. So, what should we do in such circumstances? Should we follow the example of billionaire investor Bill Ackman and exit Starbucks Corporation (NASDAQ: SBUX) in view of the potential headwinds the company could face in China due to the Coronavirus outbreak? What does history tell us about the stock market’s reaction to previous health epidemics?

Perhaps unsurprisingly history shows us that the stock market’s negative reaction to health crises is often short-lived. The graph below indicates that financial markets have managed to shrug off each world epidemic since the 1970s including SARS, Swine Flu (H1N1), Ebola and Zika. This should give comfort to investors as clouds of fear and uncertainty continue to hang over the markets.

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VIA conclusion

As long term investors in the stock market, the best thing we can do now is to keep calm. Not having a clear head at this time can lead to irrational decision making, which may undermine your investments. We should believe that with advances in medicine, the world today is better equipped to curb the contagion effects from an outbreak than ever before. We can and will overcome this current pandemic, just as how we have overcome past health crises. 

Yes, in the short-term, the Coronavirus will likely impact the revenues and profits of the businesses we own. But we should not let near-term earnings impact cloud our judgement on the long-term economic value of a business. Strong businesses can and do recover from temporary setbacks. Hence, if we own shares of fundamentally sounds businesses, we do have to be worried about short-term price volatility, as the long-term economics of the businesses will eventually pull stock prices back up in line with commercial reality.     

Instead, if we have been building up our war chests, we can be ready to pounce when the stocks market presents us with opportunities to acquire good quality businesses at beaten-down prices. Contrary to popular belief, uncertainty actually is the friend of the buyer of long-term value.

To end, I leave you with this quote from Howard Dean, “we will ultimately be judged by how we react in times of trouble.” Let us forget the noise of the markets and pray for the victims of the Wuhan Coronavirus and their families. Let us also be thankful for the thousands of medical professionals who have bravely put their lives on the line to serve and heal in this time of grave need.

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