How the coronavirus will affect investors

The economic impact of the coronavirus is starting to be felt.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Quite rightly, the coronavirus originating from the Chinese city of Wuhan is making headlines around the world. Until recently, most of those headlines related to the human impact, in terms of the numbers of people infected, falling ill, and – sadly – dying.
Attention, though, is now starting to turn to the economic cost. In 2003, when the China-originating SARS coronavirus epidemic swept Asia, China’s economy – and especially its manufacturing industry – were a fraction of their present size.
Back then, China made up just 7% of global manufacturing output. These days, it’s about 25%. So when a swathe of factories across China cease production, it isn’t going to be long before the effects are felt elsewhere.

Fractured supply chains

And this is precisely what is starting to happen.
South Korea’s Hyundai is already badly hit, unable to source Chinese-manufactured components. Fiat Chrysler is also talking about suspending production in some of its European operations, for the same reason. Nissan has announced the cessation of production at one of its Japanese plants, again because of parts shortages.
Given how tightly synchronised the world’s automotive supply chains have become over the past few years, it’s hardly a surprise that it’s the automotive industry that has felt the pinch first.
If Chinese production re-starts soon, the industry might quickly recover. In the aftermath of the 2011 earthquake and tsunami that hit northeastern Japan, the industry has worked hard to build more resilience into its supply chains.

The workshop of the world

How quickly Chinese production resumes, though, depends on the progress of the virus, and on the associated preventative measures. And if such measures continue – and factories remain closed – then it won’t be long before other industries are affected.

China is the workshop of the world. And when that workshop shuts down, businesses elsewhere suffer. Retailers, for instance, may run out of stock of China-sourced items.
For investors – especially UK investors – the likely impact of the coronavirus will be experienced slightly differently, at least in the immediate future, and in the expectation that a large-scale outbreak can be avoided in the UK.
For UK investors, the impact will come about through the effect that the coronavirus has on China’s economy, and on the economies of other Asian nations that are affected. 

The Chinese shopper isn’t shopping

First, companies whose earnings depend on their operations within China and other Asian nations could be affected.
The early signs of this are already happening. Shares in HSBC (LSE: HSBA), for instance, are down – although this partly relates to the bank’s reported succession troubles, and its exposure to the ongoing unrest in Hong Kong. The UK makes up around just 4% of HSBC’s earnings – while Asia is a massive contributor.
Standard Chartered (LSE: STAN) is similarly exposed, and both it and HSBC are offering Hong Kong customers coronavirus-related debt relief measures such as mortgage holidays and interest-only periods.

Luxury brand Burberry (LSE: BRBY) is another company suffering pain. Just over a third of its 60+ stores in China are shut – and China is a major revenue-earner for the brand.
And my sense is that it won’t be long before other luxury brands begin reporting falling sales, too. China’s consumers are prolific shoppers – and when they’re confined to their homes, they aren’t touring shopping malls.

Resource-hungry China is suddenly sated

Second, companies that export to China could also see falling sales, as a slowed-down Chinese economy consumes less.
Exporting to China is big business for Australia, for example: think BHP Group (LSE: BHP) and a number of other Australian mining firms.
Put another way, it’s no surprise that the Australian dollar is at an 11-year low.
Also heading downwards are oil prices, as China’s prodigious consumption slows. Hong Kong-based analysts at Morgan Stanley claim to literally see the effect of this in the amount of air pollution they observe from their high-rise offices looking out over China: activity could be as much as 80% below normal levels, they estimate.
I see in the news that LPG carriers and oil tankers being told to go away, with Chinese importers declaring force majeur.

What to do?

Reports that I’ve read have advised investors to seek safety in cash, or gold.
That certainly isn’t what I’m planning to do. This is precisely the sort of event that drives share prices down across the board – as we’ve seen happen with the Footsie already – and I wouldn’t be surprised if they fell further.
Likewise, the share prices of companies directly affected by the impact of the coronavirus, such as those mentioned above, can also be expected to come under the cosh.
Bargains will emerge, much as they did during the last big sell-off, in early 2016.
The trick lies in being ready to take advantage of them. Such a sentiment may be in poor taste – and let’s not forget that the coronavirus is a very real human tragedy – but it’s nevertheless a reality.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Malcolm owns shares in Royal Dutch Shell, HSBC, BHP, Legal & General, Imperial Brands, Royal Mail, and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended HSBC Holdings and Imperial Brands. 

More on Investing Articles

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

After crashing 50%, is now the perfect time to buy this world-class FTSE 250 share?

The worst-performing share on the FTSE 250 over the last year is also the most exciting one of all. How…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: July’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »

Investing Articles

Will the Tesco share price hit a 10-year high in 2024?

Up from 200p less than two years ago, the Tesco share price has enjoyed impressive growth lately. Now I'm considering…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Nearing its 12-year low, this FTSE growth stock could be the bargain of the year!

Harvey Jones has happy memories of owning this FTSE 100 growth stock. Now he's wondering whether to take a trip…

Read more »

Investing Articles

BT share price: a bargain or one to avoid?

This Fool has been keeping tabs on the BT share price. Despite looking cheap, he's steering clear of the stock…

Read more »

Electric cars charging in station
Investing Articles

Where will Tesla stock be in 5 years? Here’s what the experts say

The analysts' outlook for Tesla stock in the next few years seems to be all over the place, as the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

3 reasons why I predict UK shares will soar over the next 12 months!

Our writer believes there are plenty of reasons why UK shares will do well over the next year or so.…

Read more »