Global Capital Markets Infected by The Coronavirus
Is the economy strong enough to fight off the effects of the disease?
Investors continue to panic over the disastrous effects of the coronavirus. As COVID-19 spreads beyond China, with more than 100,0000 cases in over 100 countries, the worries of a persistent global economic decline has investors frightened. Concerns increase as the prospect of a global recovery for 2020 plummets alongside previous capital gains.
Financial markets have been sick and suffering for the past month, “global stocks plunged to four-month lows, government yields sunk to unprecedented levels and crude oil extended declines as anxiety over the spread of the coronavirus weighed on financial markets”, as cited in the National Bank of Canada’s Market Review. The tailspin experienced by US equities is representative of the fears investors hold on the possibility that the deadly virus will hurt global economic growth. Monday was a terrible day for investors as the Dow sank over 2,000 points (7,79%), its biggest drop since 2008. The S&P 500 fell by 7%, triggering system-wide circuit breakers that resulted in a 15-minute trading halt for all stocks within three minutes of the market open. The NASQAD composite closed at 7,950.68 after it fell 7.29%. A brewing oil price war between Saudi Arabia and Russia, coming after the announcement of slashed oil prices from the middle eastern producer, has further harmed financial markets already weakened by the coronavirus.
Goldman Sachs revised its earnings estimate for US companies in 2020, now predicting 0% growth. Why have corporate profit forecasts been so heavily diminished? The pessimism on future earnings reflects the “ the severe decline in Chinese economic activity in Q1, lower end-demand for US exporters, disruption to the supply chain of many US firms, a slowdown in US economic activity, and elevated business uncertainty”, says Goldman’s chief US equity strategist David Kostin in a note to his clients. China matters both as a source of demand and supply. In 2019, China was responsible for $2.1 trillion worth of imports. As the world’s second largest importer, sales in China represent a huge revenue source for multinationals. As the biggest producer of manufactured components, China’s exports are an essential part of countless international supply chains.
Companies such as Apple and Nike have released public statements that they are unlikely to meet their earnings and revenues for the next period seeing that their supply chains have been interrupted by the deadly virus. Production in China has stagnated as many cities are quarantined and individuals are advised to remain within the confines of their homes. With very limited production and low levels of demand, businesses are unlikely to meet previous earnings forecasts. Production has also slowed for Apple, which expects to sell fewer products due to a persistent decrease in Chinese consumption. China presents strong revenue streams for the company as it accounts for nearly 15% of sales for Apple. A Chinese quarantine poses a serious problem for Nike as well, as approximately 18% of Nike’s sales flow from the greater China region.
Blue chip stocks have taken some serious hits as large portions of their income derives from the Chinese economy. On February 26th, tech giant Microsoft also raised worries as it warned investors that it would be unable to reach its revenue guidance for the segment that includes Windows. Other giants such as HP also disclosed that they would miss guidance for similar reasons. US stocks continue to close at lower levels and investors are seized by anxiety. The economy is tumbling towards worrisome territory, heading for its worst year since the financial crisis.
The number of quarantined regions continues to grow, a serious blow to international economic health. On Monday, Italy expanded its quarantine to the entire country as the country’s case count and death toll surge. Prime Minister Giuseppe Conte has banned all public gatherings and suspended sporting events in addition to forcing many schools and restaurants to close their doors. Furthermore, Italy’s tourism federation has announced that 90% of hotel and travel agency bookings have been cancelled in Rome for the month March.
Qantas airlines was forced to ground eight Airbus A380s and ask staff to take an unpaid leave. Chief executive Alan Joyce is also said to take no compensation for 2020 due to the “sudden and significant drop in forward travel demand”says the airline. Forced to adopt cost cutting measures, airlines around the world have closed routes and allowed customers to change their travel plans without a fee for the next year. A negative outlook for the future of airline travel grows as “The International Air Transport Association has estimated that global revenue losses for passenger airlines in 2020 will be between $63 billion and $113 billion”.
The loss of others means the gain of some. While a large number of companies are suffering from what is perhaps likely to become a pandemic, a few players are reaping major gains from the virus. Clorox is one of those winners. Just as Clorox beats 99% of germs, the company is beating 99% of stocks on the market. Clorox shares reached record highs as Wall Street bets on strong sanitizer and disinfectant sales during the outbreak.
History has shown that stocks typically rebound from disease outbreaks. For instance, the Zika virus in 2016 led to a global stock market shed of 6% a month after Zika erupted, but only half a year later the losses were down only 0.6%. Two years later the Ebola virus broke out, resulting in a loss for global stocks of over 7%, six months later, that decline reversed as well. The current approximate case-fatality rate for COVID-19 is 3.4%, much lower than the mortality rate from Ebola at 50%. Perhaps markets may also recover from this latest virus.
Fear rises as investors lose hope that earnings will somehow recover once the virus is effectively treated and the outbreak better controlled. As doctors treat ailing patients, economists, governments, and central banks attempt to mitigate the effects of the coronavirus panic on the global economy. For now, at least, everyone is on standby until a vaccine is developed to better treat the deadly outbreak.
Note: All values are in US dollars, unless stated otherwise.