In the wake of the sharp decline we've seen across emerging-market equities and global markets amid growing concern about the coronavirus, it should be remembered that China and parts of Asia have been laboring with the ramifications of the outbreak since the beginning of the year. The market reactions of the past few days appear to have been triggered by the realization that global supply chains may be affected—and that things are coming closer to home, from a Western perspective, with infection rates picking up.
From our perspective, this is a watershed for public health, with the spread beyond China triggering an exogenous shock necessitating reassessment of the economic and corporate risks globally, not just in emerging markets.
These center on impacts on growth and profitability arising from:
- Reduction in demand, not just in China, but with abrupt disruption to travel, leisure, and retail globally
- Manufacturing companies with factories in—or dependent on—China
- Supply chain disruption and delayed product launches following prolonged factory closures, affecting critical components and trade flows across Asia
- Commodity-exposed companies (e.g., metals, energy)
- Consumer companies hit by low footfall, wage cuts
- Second-order impacts as cash flow problems escalate
The playbook from previous virus outbreaks had encouraged the view that the impact would be temporary, with short-term weakness to be followed by a strong rebound in subsequent quarters given suppressed demand, inventory rundown, and counterbalancing policy actions. This, in our view, had led to a degree of complacency, as easing financial conditions and lower bond yields provided crucial support to offset growth fears.
The coronavirus impact won't be uniform across emerging markets
However, and whenever this outbreak peaks, recovery will not be linear, and the consequences will be far-reaching, with negative and positive implications for policy, human behavior, and complex supply chains. Lower Chinese exports will affect a wide range of categories, including autos, textiles, and pharmaceuticals (75% of antibiotics imported into India, for example, come from China).1 But there may also be export share gains for vertically integrated companies, and the impact will be to further encourage the diversification of global supply chains and the drive to self-sufficiency, trends that were both stimulated by the trade war of the last two years.
The unique impact in China
Within China, the effect is likely to accelerate structural changes already in place, enabled by technology. The need for improvements in public health infrastructure will encourage faster development of smart cities, enabled by the Internet of Things with the accelerated deployment of 5G already under way. Industrial automation will increasingly replace physical labor, not just in manufacturing but in delivery. Individual behavior will change: the use of more apps, more home delivery, the move from offline to online shopping, entertainment, healthcare, and education.
In our view, the acceleration of these secular changes creates long-term opportunities for astute entrepreneurship and innovation across a range of industries and emerging markets. That said, care is needed to manage entry points during this period of extreme market volatility to invest in businesses that are poised to emerge strongly from this period of uncertainty.
1 “Chinese cheer for Indian exports,” The Hindu, March 4, 2019.