Weighing up potential market impacts from the coronavirus
World in Motion – Global equities blog

Weighing up potential market impacts from the coronavirus

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 difference is that the infection has now clearly left Asia. Europeans and people in the US had been comfortable that this was a China issue with selective outbreaks in the rest of Asia, but that view of markets has been shattered with the S&P and other world markets well off their recent highs.

What will the economic impact be?

So far we see two clear impacts: lost consumption and lost supply. Looking to China, as the disease becomes the dominant factor in people’s thinking consumption falls. A recent Adidas market update stated that its Chinese business had fallen by 85%1 – 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 a significant portion of the drop in consumption will be lost forever. While we might still ultimately replace a smartphone, we are now 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. 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, and 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 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 forecast for this year.

Another way of thinking about this is that the slow growth environment the world economy has experienced since the global financial crisis 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)

Chart showing companies last 12 months earning (1988-2019)

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.

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.

1 March 2020
Neil Robson
Neil Robson
Head of Global Equities
Share article
Share on twitter
Share on linkedin
Share on email
March 2020
Share article
Share on twitter
Share on linkedin
Share on email

PDF

Weighing up potential market impacts from the coronavirus

Sources:
1 Adidas says business activity in China has tanked roughly 85% due to coronavirus, CNBC, 19 February 2020.

For use by Professional and/or Qualified Investors only (not to be used with or passed on to retail clients). The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at Risk. The mention of any specific shares or bonds should not be taken as a recommendation to deal.
This information is not investment, legal, tax, or accounting advice. Investors should consult with their own professional advisors for advice on any investment, legal, tax, or accounting issues relating an investment with Columbia Threadneedle Investments. The analysis included in this document have not been prepared in accordance with the legal requirements designed to promote its independence and have 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. This information includes forward looking statements, including projections of future economic and financial conditions. None of Columbia Threadneedle Investments, its directors, officers or employees make any representation, warranty, guaranty, or other assurance that any of these forward looking statements will prove to be accurate. (Include if use logos) All intellectual property rights in the brands and logos set out in this slide are reserved by respective owners.
Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com

Related Blog Posts

15 June 2021

Scott Woods

Portfolio Manager

Masts, manufacturing and meetings – 2021 so far in the global smaller companies universe

Visiting companies is key to small cap investing in particular. Scott Woods looks at how the pandemic has changed this.
Read time - 3 min
14 June 2021

Neil Robson

Head of Global Equities

Electric vehicles help power growing decarbonisation trend

Why understanding new ways of thinking and a changing world is critical to our investment process.
Read time - 2 min
24 May 2021

David Dudding

Portfolio Manager, Global Equities

The destruction of creatives

Advertising spend was huge during lockdown, but it's not the traditional players who are benefiting. This changing market highlights some of the difficulties with 'value investing' at a time of technological change.
Read time - 2 min

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.