With the coronavirus outbreak continuing to spread, we take a look at some of the stocks and sectors to watch and consider the likely long-term impacts across sectors.
Coronavirus: what’s the latest?
The coronavirus, also known as ‘2019-nCoV’, has now infected over 40,600 people and caused more than 900 deaths. The epicentre of the outbreak is in Wuhan City in the Hubei Province of China, where most of the confirmed cases and deaths have been reported. This new virus is part of the family of coronaviruses that include everyday illnesses like the common cold and more serious viruses like SARS and MERS.
Fears over the coronavirus have risen as the death-toll has now surpassed that of the SARS epidemic in 2002/03, which also started in China and ultimately claimed 774 lives. Other countries that have confirmed cases of the new virus include Australia, Belgium, Cambodia, Canada, Finland, France, Germany, India, Italy, Japan, Malaysia, Nepal, the Philippines, Russia, Singapore, South Korea, Spain, Sri Lanka, Sweden, Taiwan, Thailand, United Arab Emirates, the UK, the US, and Vietnam.
The World Health Organisation declared the coronavirus outbreak as a global health emergency on January 31. Individual countries have started to follow, like the UK’s declaration that the virus is a ‘serious and imminent threat’ to public health.
How is the coronavirus impacting stocks?
The biggest impact has been felt in China but the country’s pivotal role in the world economy, twinned with fears that the virus will cause a significant slowdown, means this has spread worldwide.
There are two types of companies that are among the worst-hit by the outbreak so far. These are companies that either generate material sales or source a substantial amount of supplies from China (or both). Travel, leisure and hospitality stocks have also suffered.
We have a look at how the coronavirus is impacting stocks and sectors from around the world:
China is a key part of the global supply chain for carmakers and a major market for sales. This means the outbreak is not only set to hit sales of cars in the country but also cause a slowdown in the supply of parts. A number of carmakers have warned of both.
Toyota, the second largest carmaker in the world, warned that sales in China will be impacted and said it was looking at how it can mitigate the risk of being left short of the parts it needs. Hyundai and PSA Groupe have also said the coronavirus could disrupt their supply chains.
Fiat Chrysler’s chief executive, Mike Manley, told the Financial Times that there is a risk it could have to stop production at one of its European car plants because it is struggling to source the components it needs from China. Manley warned that four suppliers in China had been impacted by the outbreak, including one that provides ‘critical’ parts. It said it would provide an update in February, when it hopes to know whether or not its European plant can keep up and running.
China is in a state of lockdown and travel is highly restricted. Plus, most airlines have either stopped flights to affected regions altogether or placed severe restrictions on travel. All-in-all, over 50 airlines from around the world have halted flights to and from mainland China, while many other countries like the US and Australia have imposed strict entry rules for non-citizens attempting to fly-in from China. Those with large exposure to China have been the worst hit, but the impact has been felt across the entire industry because of fears that the decrease in people travelling will ripple into other key markets.
There are fears that the coronavirus will cause a significant slowdown in demand for commodities because China is the biggest consumer of energy and metals in the world. Travel is being severely limited and overall consumer demand is weakening. This has seen the price of key commodities plunge in recent weeks, including iron ore, copper and oil.
As a result, the producers of these commodities have suffered. For example, the FTSE 350 Mining index has shed over 5% since the start of 2020 while the FTSE 350 Oil & Gas Producers index has plunged more than 9%.
Burberry, the London-based luxury fashion group, makes almost 40% of its total sales in Asia, mostly in China. The firm has said the outbreak ‘is having a material negative effect on luxury demand’. Chief executive Marco Gobbetti said the company has taken ‘mitigating actions and every precaution’ to help protect its employees but said this means 24 of its 64 stores in China and Hong Kong have been temporarily closed while those that have remained open are operating limited opening hours. It said spending by Chinese tourists abroad – the biggest holiday spenders – has been less impacted so far but warned this will ‘worsen over the coming weeks’.
‘We are taking mitigating actions but the benefit in the current year will be limited given the proximity to our March year end. We also intend to continue our key growth initiatives in preparation for a recovery in luxury demand. We will provide a retail trading update following our financial year end,” said Burberry.
Analysts had been expecting Burberry to deliver sales of around £2.82 billion in its current financial year before the outbreak started, with like-for-like sales growing by about 4% and underlying operating profit totalling £449 million. However, it looks like the outbreak could cause a weaker end to the financial year for Burberry, as well as a slower start to its new financial year.
French beauty company L’Oreal released its annual results for 2019 on February 6, posting strong growth in sales, earnings and its dividend. However, it too has warned that the coronavirus is weighing on sales in its new financial year. Asia represented over one-third of total sales in the year and was comfortably the fastest-growing segment of the business, powering over a 30% rise in sales on both a reported and like-for-like basis – demonstrating the importance of China and the wider region to the business.
‘[The outbreak] will have a temporary impact on the beauty market in the region and therefore on our business in China and Travel Retail Asia, even if it is too early to assess it. The experiences we have had with similar situations in the past (SARS, MERS, etc.) show that, after a period of disturbance, consumption resumes stronger than before. Therefore, at this stage, and assuming that this epidemic follows a similar pattern, we are confident in our capacity this year again to outperform the beauty market and achieve another year of growth in both sales and profits,’ the company said.
Sony, the maker of the PlayStation 4, recently raised its guidance for its current financial year but said this has not taken any impact from the coronavirus into account. As a result, it warned that the impact of the virus ‘could be large enough to eliminate the entire amount of the upward revision’ to its guidance. ‘We think there could be a major impact on our manufacturing, sales and supply chain operations, said Sony. The firm said it would update the market if it discovers that its guidance and expectations are indeed at risk because of the coronavirus.
Nintendo also warned that supplies of controllers and certain accessories could be delayed. The timing could also hit early sales of the Nintendo Switch in China considering it was only launched in the country in December.
Athleisure firm Nike said around half of its stores in mainland China have been closed and that those still open are operating reduced hours and experiencing lower footfall than normal. ‘In the short term, we expect the situation to have a material impact on our operations in Greater China,’ said Nike in early February. Greater China accounts for 17% of revenue and is by far its fastest-growing region. Sales in China grew 21%, three times faster than anywhere else, in the 12 months to the end of May 2019.
Apple said at the start of February that it had closed down all of its 42 stores in China, as well as its corporate locations, in response to the coronavirus. The iPhone maker said it would keep them closed until at least February 9, but has not yet said whether they have been reopened or if they remain shut.
The majority of iPhones are produced in China, with Hon Hai Precision Industry, better known as Foxconn, being its largest supplier, but neither company has said how the virus is impacting production. The Nikkei Asian Review reported that the Chinese government had blocked Foxconn’s plans to reopen its factories and that this would hit other major customers including Amazon and Alphabet’s Google.
Disney has temporarily closed its theme parks in Shanghai and Hong Kong and this will impact its results over the short-term. ‘The current closure is taking place during the quarter in which we typically see strong attendance and occupancy levels due to the timing of the Chinese New Year holiday,’ said Christine McCarthy, Disney’s chief financial officer.
Coffee house Starbucks recently said the stellar performance it delivered in the first quarter of its financial year had prompted it to raise its guidance for the full year – but said it had decided not to revise its goals because of ‘the dynamic situation unfolding with the coronavirus’. China accounts for about 10% of total sales and Starbucks has shut down around half of its stores so far.
‘Our immediate focus is on two key priorities in China: first, caring for the health and well-being of our partners and customers in our stores, second, playing a constructive role in supporting local health officials and government leaders, as they work to contain the coronavirus,’ said president and chief executive Kevin Johnson.
Fast food giant McDonald’s has also had to shut hundreds of restaurants in China, which accounts for about 5% of its global sales.
Coronavirus: how to trade the outbreak
It is still early days for the coronavirus, and it is unclear how long the outbreak will last or what toll it will take on people from around the world. The worst of the virus is still largely confined to China, but people outside of the country have succumbed to the virus and more deaths can be expected over the coming weeks.
Most companies have said it is too early to quantify the full impact of the virus, but its potential has already become clear for any company that derives a significant amount of sales or supplies from China.
The real financial impact won’t become clear until economic data starts to flow out of China and companies release results for the first quarter of 2020 starting in April. If the outbreak continues to spread, then this weakness could stretch into the following quarter. For some investors, this could be a great opportunity to capitalise on lower entry prices for stocks that should prove resilient in the longer-term.
There are some areas that are benefiting from the coronavirus outbreak. Safe havens like gold (and the stocks that mine them) have seen prices rise, while many healthcare stocks have also benefited. Take US firm Alpha Pro Tech, which makes face masks, as an example. The stock’s share price had stagnated for years, but has risen more than 60% since the start of 2019 as investors hope it can capitalise on the need for protective gear.