High hopes for recovery from virus

  • Markets
  • Monday, 24 Feb 2020

Apple, one of the biggest casualties of this epidemic, jolted markets when it warned of not meeting its revenue forecast, as demand for smartphones may be slashed by half in China in the first quarter.

HOPES are running high that the earnings and operations of virus-hit companies can gradually recover, on some decline, seen on certain days, in the number of new cases in China.

Despite some data mistrust on the twice-changed virus counting method, some factories are targeting to resume full operations by the end of the month.

It is vital that these hopes are not dashed as much is at stake, buoyant US markets and possibly a slight rebound in global growth on a little easing of trade tensions.

The spread of the virus to other countries like South Korea, is the latest worry.

Companies are racing to develop vaccines based on an array of timelines; fast tracking of vaccine development may begin trials only in late April, said Chinadaily.

The far-reaching impact of this virus attack is not just seen across the retail and consumption scene in China; a CNBC analysis shows that almost one in five S&P 500 companies expect a hit on their revenues or profits.

This ‘high level of concern’ over the potential drag on first quarter earnings is reflected in their analysis of more than 180 earnings transcripts and other corporate releases since the beginning of 2020.

Apple, one of the biggest casualties of this epidemic, jolted markets when it warned of not meeting its revenue forecast, as demand for smartphones may be slashed by half in China in the first quarter.

Taiwan’s Foxconn, the world’s largest contract electronics manufacturer and maker of smartphones for Apple, also sees a hit from the halt in factory operations in China.

From 19 locations in 2015, Foxconn has expanded its operations in China to 29 last year.

The supply situation is dire at Jaguar’s British factories which could run out of parts by the end of this week.

The Chinese car market is down by 92% in the first half of February; Jaguar is not making any sales there; Daimler, the maker of Mercedes Benz, warned of “significant adverse effects” on production and the procurement market.

Half of China’s shopping malls are still shut; S&P Global is projecting a ‘significant’ drop in first quarter sales for the restaurant, retail and leisure sector in China, while tourism will likely suffer a ‘severe blow’ in revenue for the first half.

Real estate sales growth in the third and fourth tier cities may not recover this year, said S&P Global in its report.

Seven films targeted for release during the Lunar New Year period were pulled out, causing 1.4 billion yuan (US$210mil) in losses at the box office, said CNBC.

E-commerce, said to have become more popular, is hit by disruptions such as road closures and delay in employees returning to work.

Adidas’ sales in China have slumped by 85% from the Lunar New Year on January 25 against the same period last year.

Qantas may suffer a drop of US$100mil to US$150mil in earnings this year, while Air France-KLM expects a drop of US$215mil in operating profit in the first quarter.

Maersk, which operates the world’s biggest shipping fleet, warned of a ‘very, very weak February’ and a ’weak’ March.

Asian lenders expect to set aside more money to provide for soured loans at virus-hit companies; DBS Bank could see a 1% to 2% drop in revenue due to this.

HSBC may incur US$600mil in additional loan losses if the epidemic continues into the second half.

Following the resumption of factory operations, some catch up in March will help, to a certain extent, to even out the impact of disruptions in February.

If the infection starts to spread among workers, the situation could be worrying, said RHB Research Institute chief Asean economist Peck Boon Soon.

Commodities have taken a huge hit as China is a huge commodity market.

BHP Group, the world’s biggest miner, has warned that the demand and prices of raw materials will likely drop if the epidemic extends beyond the end of March.

Credit markets are also bracing for a big hit as cashflows of Chinese companies slump following the quarantine, self-imposed or otherwise, of consumers, said Inter-Pacific Securities head of research Pong Teng Siew.

While mainland developers scramble for cash and turn to short term debt, Singapore banks are offering assistance packages for home mortgages and affected businesses especially small and medium scale enterprises.

US growth in February slowed to 0.6% compared with 2% in January, as manufacturing production almost ‘ground to a halt.’

Total new US orders had fallen for the first time in a decade.

For the first time since 2013, IHS Markit’s flash services purchasing managers’ index went into contraction territory, registering 49.4 in February.

Columnist Yap Leng Kuen is watchful if risks from the coronavirus are under-estimated. The views expressed here are the writer’s own.

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