February 07 2020

Catching a Cold

The crux of today’s economic riddle is not the coronavirus itself, but how much impact it could have on the global value chain. As China coughs, the world sneezes.

At the time of writing, cases confirmed have risen to 31,000, with new daily cases decreasing for the 2nd day in a row. Casualties are at 638, and mortality rate is ~2%, far less than the previous SARS (10%), but still more than the familiar flu (0.1%). Cases are overwhelmingly contained to mainland China (99%), and more precisely to the province of Hubei (70%). Speculations abound on the future rate of expansion of the virus, as temperature warms up, and sanitary measures are implemented.

Its economic impact is already certain. More than 50m people have been quarantined, airlines reduced or outright cancelled flights to China, and port restrictions are enforced globally. In China, HK, and Macao, schools, shops, factories and administrations are mostly closed. This is putting some strain on the global supply chain.

Indeed, the rest of the world is dependent upon China’s manufacturing products. The G7 countries are mostly relying on China for textiles, machinery, electricals, and auto parts. But apart from Canada, this reliance is roughly no higher than 20% of the industrial Gross Value Added (GVA). However, China’s manufacturing imports easily represent more than 25% of total imported manufacturing for most APAC countries.

As per Oxford Economics, the GDP impact of the coronavirus in 2020 is expected to be 0.6% for China, 0.4% for APAC, 0.2% for the US. To a certain extent, the trade war had already helped firms to stir their supply chain away from China. The expectation, or rather wishful thinking at this stage, is that this episode will dent the economy in 1Q20 but will rather be short-lived.

Markets are paying attention to these tea-leaves reading, and pivoted into global bonds since the outbreak. Gold seems to be peaking as well. Mood remains mercurial in equity markets, waiting for signs of Government counter-measures. China’s liquidity injection in Feb20 ($142bn) is one of them, and others could be tempted. More helicopter money could trigger the next leg up.

Consumer sentiment runs high but spending is cautious, as the well-telegraphed “imminent recession” has taken hold of investors’ spirit. Even if economy is healthy, it is preventively wearing a mask.

360 Advisory – Markets