China: The Ease of the Disease?

Investing Psychology, Politics, Stocks Mar 11, 2020 / Reading Time: 2 mins
Divik

Pursuing a Bachelor’s in actuarial studies at UNSW, Divik has a unique curious mindset and delves deep into nitty-gritty of financial concepts, enabling him to analyse situations to-a-fault, thereby allowing his published blogs, research and opinions to be an exclusive blend of theoretical concepts, and practicality. Alongside his responsibilities at Maqro Capital, Divik works with MD, Conrad Song, and Head of Research, Edward Heng, to help initiate Maqro’s first steps in the Australian small-caps division.



Coronavirus, a going concern since late December 2019, has disrupted global economic activity and investor behavior. March 9th saw the VIX index (volatility) at a 10-year high at 54.46, which in comparison to the all-time high during the 2008 GFC of 89.53, reasons as to why investors are fearful of the future.
But recent events in China do signal hope – here’s a quick summary:

  1. Government ordering the shutdown of makeshift hospital due to a decline in the number of cases.
  2. New confirmed cases in Hubei (excluding Wuhan) have been single digits for seven consecutive days.
  3. Traffic curbs have been removed in Chibi (located on Hubei’s southern border with Hunan) as a result of a report which suggested no new infections for 19 consecutive days. Travel within the city is allowed, however travel between cities is forbidden.

Yesterday’s news also saw Chinese President Xi Jinping visiting Wuhan, which suggests that if the President is to visit the capital of the disease struck Hubei province, home to 83.9% of Coronavirus cases across China, then he himself is extremely confident in the epidemic controls and government policies in place there. This confidence has rubbed onto fellow citizens and have bolstered their hopes as recent indications suggest that the impact of the coronavirus on the supply chain have dropped as factory workers recommence work, boosting supplies and stimulating the Chinese economy.

Whilst things on the supply end of China seem to be recovering, is the demand still as prominent? And to what extent?

A very clear indication of global demand can be monitored through container operations at the ports of Shenzen. Both an interview with Lloyd’s List (by CMA CHM Chief Executive Rodolphe Saade) and analysis by leading consulting services provider SeaIntelligence, suggest that volumes at China’s ports were “returning to normal for the first time since the beginning of the outbreak”. This may be the cause as individual consumers are going on “panic buys” to build “pandemic pantries” and secure long-term fundamental needs (staples). Nielsen data has showed a big spike in US demand for shelf-stable grocery such as canned goods, flour, sugar and bottled water, all of which correlate with the increased container activity.

Albeit demand is showing signs of recovery, investors cannot disregard Europe rapidly implementing quarantine zones and shutting down parts of the economy, which poses as potential troublesome alongside the worsening viral condition over parts of Europe. With the viral condition worsening across many other countries around the globe, all of which China is a heavy supplier to, it is tricky to give a stance of where China’s demand will be in the near future.

Ultimately, global demand for supplies has been mixed and the impact on demand heavily depends on the combination between inventory levels of companies, the reaction of consumers to economic situations and any progressive movements to major components of supply chains to which China has control over. Either way, it’s best if you stock up before the docks get locked up.

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