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Covid-19: the dash for data

Tom Stevenson

Tom Stevenson - Investment Director

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

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Successful investment is not just about understanding what’s going on in the world; you have to see what’s happening before everyone else does.

Markets price expectations about the future. And they are very quick to factor in the consensus view. To get a profitable edge, you have to be quicker out of the blocks than your competitors.

The Covid-19 outbreak is a prime example of how this works. Everyone knows there will be an economic impact but there remains considerable uncertainty about the depth and duration of the likely downturn.

In previous health-scares like this, such as SARS in 2003, the economic impact was short and sharp, with a V-shaped recovery. The stock market’s resilience thus far is premised on this scenario being repeated.

Investors are essentially counting on lost sales in the first quarter being recovered in the second and the overall impact being relatively muted. Some analysts now think this might be too optimistic.

One of the problems with assessing the shape of the downturn is a lack of timely data. Measures like GDP and employment are essentially backward looking. They tell you what has happened not what is happening right now.

This is why analysts, including those at Fidelity, are busily collecting a range of slightly more obscure measures to get a feel for what is going on.

The picture these paint is more worrying than the apparent buoyancy of the world’s stock markets would suggest. Putting them together with comments from nervous company managements, they point to what might be a slower and shallower return to normal trading - what investors sometimes call a U-shaped recovery.

Some of the observations are pretty anecdotal. Investors looking out of their office windows in Hong Kong, for example, might be noticing clearer skies as the factories over the border in Guangdong province are slow to get back to full production after the Chinese New Year holiday.

This was the message from Apple this week, which said that quarantine restrictions are making it hard for key suppliers like Foxconn, which assembles iPhones, to get back to work.

Other more measurable data include traffic congestion figures, which always drop over the holiday period but then tend to bounce back quickly. This time they haven’t.

Coal consumption is another key indicator. Charts from Capital Economics in an interesting article in today’s FT show less coal being burnt than during the holiday period. Typically, consumption would by now be running at up to twice that level as power stations crank up output to meet rising demand.

Another interesting measure is air passenger numbers. These are running 80% below the same period last year as flights within and in and out of China have been cancelled.

Property sales is another number being watched closely. Activity always drops sharply while workers return home for the holiday but generally recover quickly. This time around, the market has ground to a halt.

We are already seeing the likely impact of these various slowdowns feed through into overall GDP forecasts. Even the more optimistic growth estimates see last year’s 6% growth in China falling to less than 4% in the first quarter. Others think this is at odds with the real-time data. The actual outcome could even be negative.

Understanding what is happening in China is just the first step, of course. You then need to assess what impact that will have on activity in the rest of the world. Areas at particular risk are industries with complex and inter-connected supply chains.

Car makers and technology companies are the most obvious of these. Discretionary purchases are also at risk. If you didn’t buy a new coat in February, you may well just not bother this year at all.

South Korea said this week it will do whatever it has to in order to support businesses in an economy that is highly dependent on its big neighbour. It’s the same story in Singapore. And Hong Kong, of course, is particularly vulnerable, not least because its economy is already in recession thanks to last year’s protests and the knock-on impact of the US-China trade war.

What the dash for data does show is the value of analysts on the ground and it argues for active investment rather than the passive approach which has attracted such significant inflows in recent years. If the economy and markets do take a dip, you will want to be exposed to the relative winners and not simply investing across the board, winners and losers alike.

You will also need to know whether the impact will be painful but short-lived or protracted and ultimately more damaging. Expect to become more interested in Chinese coal consumption than you have been.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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