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.
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.