Last week I wrote this post expressing some of my concerns with the short to medium term economic/market impact of nCoV. Here is a follow up at how the situations have evolved , and hits/misses of the predictions I made.
Note: Same as last post, this one is also strictly limited to the economic impact of the virus, and I am going to discuss the disease itself from neither an epidemic nor pathologic perspective.
Things I unfortunately got right:
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Supply chain disruptions: The extended and ongoing shutdown is impacting many players in the Chinese supply chain. Examples of companies being affected range from Apple to Nintendo, and probably many more considering Foxconn as a whole is being impacted, along with many other small to medium suppliers/manufacturers. On the manufacturing side we are seeing many automakers being affected as well.
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Reduced energy consumption: Oil demand dropped as much as 25% domestically. The longer the quarantine goes the more drastic this number will become. However what effects it has in the medium to long term isn't something I can predict at this moment.
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Drastically reduced domestic spending: So far we are looking at billion dollar losses to the Chinese movie box office, and much more to the entire entertainment, travel, dining and tourism industry. Small and medium businesses are being hit especially hard during this time due to the severe downturn in cashflow. Remember a small business still have to pay rent and salary even though it's forced to close. However domestic companies are not the only ones being impacted, which leads to:
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Reduced short-term revenue outlook for foreign businesses: So far many large foreign companies have suspended businesses fully or partially in China, including Disney, Apple, IKEA, Starbucks, etc. Apple has issued a wider range for the quarterly guidance due to the uncertainty of coronavirus, Coach's parent company Tapestry also expressed strong concerns, Yum has warned that the virus could lead to a Q1 operating loss, and Estee Lauder has cut its profit goals. Those are just some of the examples.
Some of those reduced revenue likely result in deferred spending, and may even lead to more profit down the road (people end up wait and buy the new iPhone later this year, for example), but some businesses like dining/entertainment may or may not result in much deferred revenue. It's unlikely someone will suddenly drink more Starbucks after this period is over.
Things I got wrong:
Market reaction (or lack of reaction so far) and outlook: This is a major one. Despite the Chinese market crashing almost 9% on the first day of trading earlier this week (and hence stabilized a bit thanks to the $180B USD cash injection from the Central Bank), the U.S. market has largely completely and utterly ignored any of these fundamental changes. It seems like the current market mindset is that this is an outbreak that is no different from SARS or the H1N1 scare, despite the fact that the quarantine measures and economic/societal impact so far is literally unprecedented. The explanation to this could either be that there is a bigger delay factor in the market movement, or that short to medium term economic prospects are no longer strongly factored into the current stock prices. The latter could be the result of everyone being highly optimistic for the long term, both economically and with regard to this epidemic. Whether that optimism is justified or not is another topic for discussion.
One big disconnect I'm seeing is how people are viewing the whole situation from China/Asia and over here. Over there my family/friends are now much more pessimistic than they were a week ago and the economic doom and gloom is definitely the common view, if not being suppressed by the government. Yet over here most people sees the whole thing as a non-consequential distraction and DOW is now at all time high. The reality may be somewhere in the middle, but I don't have the confidence to predict where it will lead to one way or the other, despite having a few guesses.
Finally, I'm not making any recommendations to trading/investing. Personally the only actions I've taken so far have been selling some covered calls to some of my holdings that have gone up quite a bit recently, and starting a position in Bilibili (I love anime, and I think streaming/online services will get a revenue boom in the short term in China due to everyone staying at home) back on Jan.30th, which has turned out pretty decent so far.
Submitted February 06, 2020 at 07:37PM by cookingboy https://ift.tt/372hKRJ
