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This brief report will outline the impacts on the economies and capital markets, as well as the actions to be taken and outlook of the event happening – novel coronavirus.

Recently, the World Health Organisation (WHO) has declared the major outbreak of a novel coronavirus (better known as Wuhan virus) as global emergency. This pandemic has caused China to issue lockdown on cities to contain the situation. More than 46 million people are isolated, with flights suspended to and from China. In addition, businesses are not resuming operations even after Lunar New Year.  This threat has already become disruptive to China and increasingly to the rest of the world. China is in dismal and has spiral chain reactions onto various industries, affecting other countries in one way or another.

This critical situation can relate to the SARS incident between 2002 and 2003. During that period, the outbreak had caused serious global economic loss of USD 40 billion and slowed the world GDP growth. Thus, it is estimated that the impacts caused by this newly identified virus will be unlikely negligible.

The virus is originated from Wuhan, China. Being the hub of transport and industry for central China, sealing off Wuhan by restricting on its transport links will have great influence on the economy outside the city.

Many large enterprises such as Microsoft, General Motors and Groupe PSA set presence in the city. By extending shutdown in factories will hit the manufacturing sector hard since Wuhan holds the significance for its booming auto industry and as major logistics centre.

The halting of transport services including trains, buses and planes means that goods cannot reach their intended destinations as planned, and it is unclear how long the transport suspensions will last.

Current and Potential Impacts on Economies

China and the rest of the globe are experiencing slowdown in their economies, specifically in tourism. Ever since the outbreak, various countries such as Singapore and Indonesia have started denying entry for visitors from China to their countries. Such measures can be effective in containing the spread of virus. However, at least 160 million Chinese tourists account for the 30 percent of the travel retail sales worldwide in 2018. This resulted in many countries reducing the GDP forecasts for 2020 as travel restrictions have been imposed hard on mainland Chinese, leading to the loss of revenue generated through tourism – hospitality, retails and aviation.

The economic impact can be keenly felt across Southeast Asia, where China is not only a major trading partner but a vital source of revenue from tourism. One of the notable examples will be Thailand. Tourism is one of the most significant sectors driving the economy of Thailand, which has been creating lucrative income all this while. One of the top nationalities visiting Thailand will be the mainland Chinese, which constituted about more than a quarter in 2018.

With the Wuhan virus spreading around and travel restrictions been enforced onto the mainland Chinese, Thailand expects to lose approximately USD 2.6 to USD 3.2 billion in income, cutting the economic growth by 0.5 to 0.7 percentage points.

The economic outlook can be quite gloomy as issues such as political upheaval, poor productivity and hefty household debt have been hovering in Thailand for some time, even before the outbreak of the deadly virus. With the current situation aggravating, Thailand may be stumbled into recession soon.

Figure 1: China is a vital source of income for tourism in Singapore

 

Another country that is experiencing similarly will be Singapore. In 2019, at least 3.3 million visitors are from China. Their spending on attractions, dining and luxury goods contribute largely to the tourism receipts. With the travel restrictions set, Singapore expects drastic drop in the number of tourists and businesses pertinent to airlines, hotels, restaurants and transport providers will be adversely affected. Singapore government has intervened to implementing measures to address the economic slowdown. Such measures aim to meet the firms’ short-term cash flow needs and provide support for the workers. The government has also offered financial help to self-employed people SGD 100 (approximately USD 72) for each day they are quarantined. Such allowance was also issued during SARS outbreak.

Capital Market

The stock market has been relatively stable in recent months, but investors are seriously spooked by the spreading Wuhan coronavirus pandemic. Panic is growing, and adverse economic implications are increasing as the number of confirmed cases in China and abroad continues to escalate. There is certain degree of uncertainty to which the pandemic will spread and intensify. Markets usually react negatively to the increases of uncertainty. As a result, many countries in Asia experience a plunge in their stock markets. Many investors are waiting for more clarity on how disruptive and severe this outbreak can turn out. Such rise in uncertainty has investors moving away from risky equities and towards safer investments like gold, which rises in price during this fearful period.

With the suspension of Disney Theme Park, Nike factory and even casinos, it is apparent that their share prices are dropping. Such period can be deemed as an opportune window for investors to invest such stocks or of similar nature of activities. However, as the predicament is still developing, the coronavirus might not reach the peak. It is notable that investors should exercise extra care when investing in stocks as the current volatility is higher.

On the contrary, with the widespread of coronavirus, healthcare and e-commerce stocks has soared. People are afraid of travelling and naturally will shop or order food online. Many medical companies are also, at this juncture, trying to provide solutions to tackle this challenge.

China commodity markets also slumbered, attributed to the increasing fears that the spread of the coronavirus can diminish the demand of copper and oil. Workers are not able to work due to the extension of shutdown in many provinces and cities of China, reducing the operating rates. Futures related to copper has also dropped its lowest since October 2019.

In general, with the exceptions of healthcare and e-commerce, majority of the shares suffered the same plight – a sharp decline in prices. It is an opportunity for investors to consider adjusting their portfolios as the situation may persist for the next 3 to 6 months.

What are the Things to Look Out for / Do?

During this perilous time, businesses and investors can look into investments instead of reserving cash flow to tide through. Particularly in the capital market, where paranoia is spreading fast with trade volumes and prices dropping drastically, one should consider entering to look for stocks that are undermined in the intrinsic value.

Companies should also find innovation ways to increase efficiency and enhance the ability to survive the crisis. One of the solutions is to maintain R&D investment during tough periods. The conventional way will be reserving cash and reducing any costs. However, the markets are ever-changing and faster than before. It is always important for companies to continue their R&D so as to create new technology or products for the future.

In addition, communication and collaboration with the stakeholders are vital in the companies’ processes.  Those enterprises that continue investing in stakeholder relations are likely in the better position to understand the changing conditions inherent to an economic downturn. They can identify concerns and opportunities, and adapt to the shifting needs, demands, and expectations of suppliers, consumers, and other relevant stakeholders, compared to companies that curtail such investments.

Corporate Social Responsibility (CSR) can help companies to differentiate themselves from their competitors. The companies are capable to recover faster from unfavourable situations. They usually strengthen connections with the local communities, improve labour productivity, enhance consumer loyalty, improve access to government procurement contracts and lower capital constraints. These elements are extremely important during the downturn as they can improve the resilience and help companies in maintaining or even enhancing their competitiveness.

When the economy sours with businesses slowing down, companies must be especially judicious when considering expense cuts that can materially impact customer experience quality. Such actions might yield short-term gains, but they also introduce serious long-term risks.  The quality of a customer experience can influence its ability to successfully navigate a downturn.

Companies and investors should not overreact to the market sentiments as the event is still developing. The coronavirus and the impacts brought by it, similar to SARS, may be short-lived. It is necessary for the parties to consider the cost-benefit of any investments and exercise prudence during this depressing term.

Outlook and Conclusion

This pandemic would be of a “black swan”. It is sudden and unplanned, unlike the course of Financial Crisis in 2008. Based on the similar natural disasters and pandemic experiences in the past, the economic impact of the virus will be most likely to be temporary, with the effects felt most in transport, tourism and retail sales.

While there is usually a rebound in economic activities after a successful containment of a health crisis, the current one has not reached that point yet. It is still premature to determine how serious this coronavirus can lead to despite the fears and negative sentiments in the markets. However, as compared to SARS, the magnitude of losses will be greater. This is partly because China has liberated the market in the recent years, increasing the trades between China and the rest of the world tremendously. As such, it will amplify the ripple effects, three to four times of the global cost incurred during SARS period.

The trade war between USA and China, even before the pandemic, has already caused disruptions in the markets and are still ongoing. This virus outbreak has only paused the tensions for the time being. Wrecking damages to the economies have been done, with transportation and freight being hit the hardest. This virulent situation is just an add-on to the precedence.

The economic outlook can be murky as the Wuhan virus impaired China’s ability to meet the purchase target as agreed in the trade deal with USA earlier in January 2019. Extended holidays for the businesses can further damage the trade economy, spilling negative effects over the countries that have been relying China as an essential source of income. However, it is too early to conclude the verdict of trade tensions as the two countries are still in negotiation for the next phases.

As for the capital markets, it will be prudent to invest on safe-haven assets such as gold and bonds in the times of health crisis. The stock markets can be lucrative when one enters precisely and only be looking for short-term gains. Current situation has worsened the markets, making them volatile and sceptical. With the plunges of tourism stocks and the appreciation of healthcare shares, it is opportunistic for investors to adopt different strategies to earn – common ones are contrarian and momentum investing. Business owners can also make use of this period to identify and acquire potential businesses. As the economies are taking hits, many companies may not be able to survive through this ordeal. Recessions can occur imminently, depending on the severity and disruptiveness of the novel coronavirus.

About BlackStorm Consulting

BlackStorm Consulting is a boutique growth consultancy firm that specialises in corporate strategy, profit management and investment management. We mainly serve clients in four sectors: FinTech, Gaming, Technology, Media and Telecommunications (TMT), and manufacturing.

Our clients and connections are internationally present and range from small and medium sized businesses, MNCs, to government agencies.