After yet another ghastly trading day yesterday, whereby financial markets across the board experienced significant downward movements, it is appropriate to attempt to take stock of the current situation and look to the future to help guide our current actions.
In my opinion, the best way of doing this is looking at China. Communication has been the cornerstone of human development and civilisation since the beginning of our existence. In today’s modern and developed world, we have the advantage of access to innovative telecommunications, however unfortunately we often do not make the best use of them.
The “19” in Covid-19 refers to the year 2019, being the year when the outbreak began in China. The outbreak originated at the tail end of the year; however, it is inconceivable how slowly the rest of the world has reacted to the outbreak, leaving us in a precarious position, as the severity of the situation was apparent for those bothering to take note of the developments in China.
One of these has been in financial markets. Markets have gone from nonchalance to outright panic over a matter of two weeks, despite the virus being around from the beginning of the year. No market has been spared, with diversification offering little respite from the barbaric assault on asset classes. Even gold and investment grade bonds saw declines yesterday. Volatility has spiked as speculators grapple between buying the dip versus selling the relief rally. Although we view an ultimate recovery from the current alarming situation to occur within the next 18 months, I fear there is more disruption until we get there as panic sets in.
As discussed, China has been front-running this epidemic from the start, and although living under a much more stringent communist regime, offers windows into the future for Western democracies. Social distancing and the accompanying economic disruption that accompanies it has already been employed effectively by China, and results are (allegedly) being achieved, and a semblance of normality is being restored in the country. The latest data for January and February coming out of China show the Covid-19 outbreak has caused worse economic damage than the global financial crisis did.
China’s National Bureau of Statistics released activity data showing an overall double-digit growth contraction. Fixed asset investment was hit hardest with a decline of 24.5 per cent. With construction either slowing down or being brought to a complete standstill. New starts of property projects tumbled by 44.9 per cent and sales volume by 39.9 per cent, evidencing the precipitous contraction in the property sector. Infrastructure investment declined by 26.9 per cent, although the government called for acceleration in mid-February.
Manufacturing investment growth recorded the worst fall of 31.5 per cent, revealing the weak momentum beneath the disruptions caused by Covid-19, which is a point of concern after activities come back online. Retail sales declined 20.5 per cent with consumer services likely even worse. Demand indicators depict a similar picture of significant contraction in the Chinese economy in the first two months, with all components hit. Retail sales (as a proxy of goods consumption) shrank by 20.5 per cent in nominal and 23.7 per cent in real terms, pointing to the deflationary power of the outbreak as prices dropped by four per cent.
Online sales weathered the storm relatively better, delivering a three per cent growth, but still much slower than a pre-virus running rate of about 20 per cent due to disruptions to logistics. The hardest-hit sector was catering, with sales dropping by a whopping 43.1 per cent. Consumer staples were in general more insulated than discretionary. Foods sales grew by 9.7 per cent and beverage by 3.1 per cent, probably related to panic stockpiling. Medicines increased 0.2 per cent while in contrast, jewellery sales plunged by 41.1 per cent, autos by 37 per cent and home appliances 30 per cent.
Retail sales do not cover consumer services, which likely contracted even more than consumer goods. As the outbreak is increasingly brought under control in China, economic activities have been resuming since late February. However, all the high frequency indicators – whether coal consumption of major power plants or property and auto sales still point to double digit decline off the same period last year.
On-the-ground observation is that the resumption of service activities remain painfully slow, especially in consumer services. The take-away is that the repercussions of this virus are deep and complex, and a world-wide recovery isn’t on the cards until the latter part of the year.
A lot will also depend on the unknown behaviour of the virus in the summer periods, and its subsequent aggression next winter. In the meantime, expect several industries to be under immense pressure, and much will depend on the local government’s willingness and ability to support its’ local businesses through these difficult times.
Caution is warranted.
Disclaimer: This article was issued by Simon Psaila, investment manager at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.