The world economy and humanity are currently devastated by the coronavirus pandemic. Stock markets around the world are down in the range of 30-40% in weeks. The pandemic began in the province of Hubei in China, in a city called Wuhan. Already in December doctors started identifying the new virus, and it since has spread across the globe, leading to massive lockdowns of towns and cities, causing tremendous loss of life and economic activity.
The economy suffered severely from the measures to control the outbreak
To control the pandemic, China had to lock down Wuhan. No simple task, considering the fact that the city’s population is more than 11 million people, approximately two times the entire population of Norway! It also shut the area off from other parts of China in order to stop the spread.
This all happened during the Chinese New Year, normally the main period for economic activity in China, as millions of people travel across the country to visit family and celebrate the festivities. Typically, this is a time of year they also go on a spending spree. The Chinese economy, which had just started to recover from the slowdown caused by the trade war with the US, suffered severely from the measures to contain the outbreak.
China is now set to return to normal? Initial signs promising but still early days.
However, the lockdown has helped China flatten its infection curve and the country is now set to return to normal as the number of newly infected are reduced to almost zero. The city of Wuhan is expected to come out of lockdown on April 8th, giving confidence that China may have overcome the worst of the outbreak in terms of loss of lives and infections.
The focus will now shift to the damage the virus has caused the economy and how quickly the country can recover from the shock. By being the country first hit by the outbreak, and the first emerging from it, China will be looked at as the model of how life proceeds and hopefully normalizes by other countries that have been greatly affected by the virus.
There are initial signs that China may have hit the recovery path
The government has implemented a lot of measures to ease the financial conditions for the small- and midcap sector, as well as other businesses, in order to keep them afloat. They have launched incentives to resume consumption activity and eased monetary policy to reduce the burden of interest payable by businesses. It will take a while for activity to completely normalize but there are initial signs that China may have hit the recovery path.
Tencent, the Chinese Internet giant, mentioned during its 4Q19 earnings call that its payments business (which have completely slowed down in February) started to show a decent pick up in month of March, indicating that retail sales was picking up again. Nike, the US footwear and apparel company, recently noted that most of their stores in China were operating again: sales recovery is apparently happening at a decent pace. Apple has re-opened most its Chinese stores after closing stores in Europe and the US. Tongcheng-Elong, a Chinese travel company focusing on domestic travel, did mention that revenues in the first quarter will be depressed, but guided towards a better-than-expected second half of the year. They also mentioned that domestic activity started showing signs of improvement from mid-March onwards.
Some sectors are still struggling
There are admittedly quite a few sectors still struggling. Especially the car industry has been hit hard. Its sales have plunged almost 70-80% during this crisis, and the hope for the sector remains some form of stimulus from the government to help navigate these difficult times.
Many companies have turned cautiously optimistic about the second half of 2020, as they see a normalization of around 70-80% of business activity by May. The markets are currently discounting a lot of pain by the damage this pandemic has caused to the economy, but the expectation is that the virus’ impact on human life should start to fade sometime before the summer and the focus should once again shift towards the recovery process.
We believe that China may once again lead the way.
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