Economic events
Financial markets are focused on the economic impact of the spreading coronavirus, which has already claimed 56 lives and infected around 2,000 people across more than a dozen countries. The disruptions caused by the rapidly spreading virus are bound to hurt the prospects of certain sectors such as transport and tourism directly, and if it is not brought under control quick enough, its knock-on effects will likely be felt in other sectors.
“The transport sector will be hard hit especially in Hubei province, the epicenter of the outbreak, which is responsible for 5% of the country’s passenger traffic. Broader consumption will also suffer, albeit to a lesser extent since some households will stockpile necessities and many with overseas travel plans will stay home and spend locally instead,” said Capital Economics in a report on Friday. Its analysts have already factored in a slowdown in Q1 to 5.3% from 5.7% in Q4, but they added that a more pronounced slowdown is likely if it is not quickly contained. Although the fatality rate is lower than it was during the 2002-2004 SARs outbreak, the coronavirus has a faster rate of transmission and this risk could be compounded by the efficiency and connectivity gains that have been made since then by the global economy.
S&P Global has identified the potential channels of household consumption, corporate capex, government consumption, trade and supply disruptions through which the virus could affect the economy. The rating agency said that while the macro-level impact was likely small, the location of Wuhan complicated the issue. “Wuhan is an important national transport hub, given its central location and that the city is a stop on the two major north-south and east-west high speed rail lines,” it said in a report underlining the risks of restricted movements in that region.” Overall, we think it is too early to start thinking about revising our GDP growth estimate for 2020 due to the coronavirus. Our forecast remains at 5.7% after 6.1% growth in 2019.”
China’s stock markets are shut this week for the Chinese New Year holidays, giving investors some time to monitor the authorities’ containment efforts without having to experience volatility in markets and portfolio fluctuations.
“Given the travel restrictions, the biggest risk that we see to economic growth post the golden week (CNY) is the return of industrial activities (migrant workers) and the distribution of goods and services. The market may start to price in a three-month travel restriction; listed companies that are headquartered in the city or highly dependent on the Hubei province may suffer the most,” said Jefferies analysts in a report. They identified Dongfeng Auto, Changjiang Securities, Tianfeng Securities and Fiberhome Telecom as the biggest companies, by capitalization, that are most exposed to Wuhan.
The outbreak is likely to be a high-impact, short-lived event, Oxford Economics said in a report while drawing parallels with the SARS epidemic. It said the duration and severity of the outbreak would influence growth forecasts for Q1 and Q2.
Beyond China, the economies that have a higher share of tourism in GDP terms and are more reliant on Chinese tourists – Hong Kong, Thailand, Vietnam, Singapore, and the Philippines – to feel the impact more, Oxford Economics said. But it added that all these economies have available policy space to buffer domestic demand, if needed.
The interest rate decisions of the US Federal Reserve and the Bank of England on Thursday are also on investors’ radar this week. The Fed will likely to keep rates on hold but analysts will monitor the central bank’s tone about repo interventions in the banking system and its balance sheet expansion.
“If Fed signals “Carry On Liquidity” next week, then irrational bullish phase continues in Q1,” BofA Securities analysts said in a note.
The Bank of England’s rate decision is less clear as last week’s economic data reflected a better than expected recovery following the outcome of last month’s election, dimming rate cut chances.
“Neither strong enough to rule out a Jan cut, nor weak enough to guarantee it,” said BofA Securities analysts after better than expected PMI data.
Fund flow
In the week of January 16 to 22, global bond inflows (+US$16 billion) marked their second-longest inflow streak, led once again by corporate bonds, Jefferies said in an analyst note. Global equity fund inflows (+US$8.0bn) softened but EM (including Latam & EMEA) inflows strengthened, it said. BofA Securities analysts said global bonds received the sixth largest week of inflows ever while precious metals – with $1.7 billion – received the largest inflows in 17 weeks.
Companies in focus
China’s Semiconductor Manufacturing International Corporation said it had entered into an agreement to purchase equipment worth $1.12 billion to expand its wafer-manufacturing capacity. The stock price has risen by over 35% in 2020 as chipmakers gear up for the 5-G boom.
Japan’s Aozora Bank after it’s rating was downgraded. S&P Global downgraded its rating to BBB+ on lower chances of support from the government.
Indonesian telecommunications tower company PT Tower Bersama after its rating was upgraded by Fitch on Friday. The rating agency said the company’s management was committed to deleverage its balance sheet while improving its business profile.
