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Artemis Global Select Fund co-manager Simon Edelsten examines the potential effects of the COVID-19 outbreak, highlighting China’s importance to the global economy.
This article originally appeared on www.trustnet.com on 24 February 2020.
A friend sent me a picture last week of the transit lounges in Hong Kong airport. Normally frantic, they are eerily empty.
It is a reminder that much of China is still in shut-down mode, gripped with anxiety over the coronavirus outbreak.
The Chinese lunar new year holiday ended on January 31st, but in key provinces responsible for more than 90% of Chinese exports, factories still remain closed or running well below capacity. More than 200 million Chinese travel to their home towns for the holidays each year – many are trapped. Trains are running empty. Production of thermal coal, which powers electricity for much of Chinese manufacturing, is expected to be down by about 200 million tonnes over the quarter.
So far more than 2,500 people have died and over 75,000 have been infected1. The hope is that the virus has peaked and things will get back to normal soon, but given that it is the infection rate rather than the mortality rate that matters with this virus – and the infectious period is two weeks – authorities are unlikely to give the all-clear quickly.
What does this mean for the global economy?
Most economists have shaved a little off their growth forecasts for the year. Once workers return, factories will no doubt go into overdrive in China and some of the lost production will be clawed back.
However, the repercussions will still be felt around the world for the months to come. Apple has issued a profit warning because of the supply issues it is facing. It appears to be pushing back the release of its cheaper iPhone. Virtually all of its iPhones are made in China, mostly by its partner Foxconn, which has a complex in Zhengzhou that employs 200,000 workers. It has restarted production but with skeletal staffing. Nissan has two factories in China that have been shut and supply problems are now impacting its Kyushu plant in Japan. Along with Hyundai, it has closed sites in South Korea. Jaguar is flying components out of China in suitcases to keep its plant in the UK operating. It says it is missing 382 key components.
Expect some manufacturers to use the issue of coronavirus to mask wider problems – and President Trump to say American companies should cut global supply chains and make things in Ohio instead.
Modern just-in-time manufacturing is now a globalised affair. A plant in the US relies on a part from Germany, which relies on a part from China, which relies on commodities from Australia. There is not much give in the system for delays without repercussions all along the chain, and many manufacturers have little clarity on just how far their production chains extend beneath their most immediate suppliers.
China, which accounts for 16% of global GDP*, is key to a staggering number of them. It is the world’s largest export economy, exporting $2.41 trillion worth of goods a year. This includes $231 billion of TVs, radios, digital antennas and Bluetooth goods, $146 billion of computer equipment, $91 billion of office machine parts, $80 billion of integrated circuits and $62 billion of telephones. China is the world’s second biggest importer3, too.
What does that mean for investors?
Global markets have been remarkably resilient but as global growth managers with a strong cautious streak, we are more hesitant.
The Chinese government’s response, once it grasped the reality of the problem, has been brutally efficient. Few other countries have the power to quarantine populations as it has. We do not know how far the virus has spread beyond China. Nor have we seen the full impact on markets. It will not be just Asian stocks that are affected.
Equity investors should take the long view. In 20 years’ time we would hope and expect to struggle to spot the coronavirus effect on charts of global market indices. But as active managers we can still do something to help reduce volatility and generate outperformance through a combination of prudent and opportune investing.
For us, more immediately, it has affected the timing of some of our investments. We expected orders for factory automation – a key theme in the Mid Wynd trust and Artemis Global Select Fund – to rise rapidly this year. We expect that pick-up to be delayed to the second half of the year now and so are holding back from adding to holdings until a clearer picture emerges, hopefully by Easter.
We are monitoring holdings and trying to assess their exposure to coronavirus impacts. We are also looking at companies that may suffer in the short term. Markets overreact and so we expect opportunities to arise. We currently have flexibility to take advantage of short-term issues to buy quality growth stocks with good long-term potential.
It used to be said that when America sneezed the whole world caught a cold. The coronavirus is making us extend that analogy. The wellbeing of China is of just as much concern these days.
1 Source: Bloomberg as at 26 February 2020
2 Source: https://oec.world/en/profile/country/chn/ [opens in a new window]
3 Source: https://www.economist.com/leaders/2020/02/13/how-chinas-coronavirus-epidemic-could-hurt-the-world-economy [opens in a new window]
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