What does the Coronavirus mean for investors?

Depending on your point of view, the collapse of Flybe was either the end of an airline or the end of an era.  Flybe wasn’t just a budget airline, it was the airline which kept the UK connected through the skies – and now it’s gone.  To be fair, Flybe had been in serious trouble for quite a while, but it might still have pulled through if it hadn’t been for the Coronavirus, the effects of which could continue to be felt long after the pandemic itself has run its course.

When China sneezes the world catches a cold?

Napoleonic-era diplomat Klemens Wenzel Furst von Metternich is credited with coming up with the saying “when France sneezes, the whole of Europe catches a cold.”.  This has subsequently been reworked into countless variations, mostly revolving around the United States sneezing. 

The U.S. is still arguably the world’s foremost global superpower, but China has been working hard to catch up.  In fact, over recent years, it has taken over a lot of manufacturing (and some knowledge work) from the U.S. although President Trump has been working to reverse this, hence the “tariff wars”, which were hurting China long before the Coronavirus struck.

Notwithstanding Donald Trump’s efforts, China is probably the world’s foremost manufacturing superpower.  It is believed to produce around 25% of the world’s manufacturing output.  To put that figure in context, back in 2003 when the SARS outbreak struck, China was producing about 7% of the world’s manufacturing output.  In other words, the world’s manufacturing community is more than three times more dependent on China now than they were about 20 years ago.

Which sectors are suffering the most?

Although media headlines tend to be focusing on the shortage of consumer supplies such as food, protective face masks and hand sanitizer (and the escalating prices for the latter), from an investment perspective, the worst-hit sectors are likely to be automotive manufacturing, travel, oil, banking and luxury retail. 

The automotive industry is hurting due to a triple whammy of dependence on China for parts, the fact that its supply chains are notoriously tight and the fact that China is a major market as well as a major supplier.  Travel is hurting because people are increasingly avoiding all but the most essential of trips and oil is hurting because of the slowdown in both manufacturing and travel.  Banking and luxury retail are hurting because of China’s importance in both of these areas.

Is there a silver lining?

At this point in time, it’s anyone’s guess how long the Coronavirus will take to run its course and how much disruption it will cause in the process.  Even as it stands, however, it has served as a wake-up call about several aspects of modern life.  From an investment perspective, an approach which could balance opportunity and risk could be to look for areas which were showing potential anyway but which have been given an extra boost due to the Coronavirus.

For example, there has been increasing pushback on the air industry on environmental grounds, so now could be a good time to look into companies which service the “staycation” market (which is already one of the UK’s rising-star sectors). 

Similarly, working from home has long been on the rise, but companies have varied widely in their willingness to support it.  The Coronavirus has really highlighted the advantages of enabling employees to work from home, at least part of the time, hence it would seem reasonable at least to keep an eye on companies which could be a part of making this happen.  The obvious candidates here are companies involved with the cloud, but companies selling home-office equipment could also be worth a look.