13 February 2020
If not exactly a black swan for international companies and markets, the outbreak of the coronavirus is at least a grey one. Analysts took the 70-question survey in December, before the virus spread and quarantine measures were imposed.
The power of the survey comes from the exhaustive research that our analysts perform on the companies they cover. Their answers are informed by some 15,000 meetings a year with senior management, keeping them close to the issues that affect their businesses in real time. And, since the survey was taken, a lot of those conversations have mentioned the coronavirus.
Our analysts note that the hotel and travel industries in China took an immediate hit, as borders closed and tourism ground to a halt. Commodities too have been hurt and the virus is expected to delay any recovery. Similarly, transport analysts are predicting a short, sharp decline in revenues from cancelled flights and reduced airport spending. One made a comparison with the SARS outbreak in 2003, during which airline stocks fell between 20 to 40 percent, but recovered quickly once the virus was contained.
Online businesses are expected to fare better. As people remain in their homes, streaming services and online gaming are picking up, while bricks-and-mortar outfits are suffering. Visits to Macau dropped 80 per cent in the first five days of the Chinese New Year period and analysts believe the virus could weigh on the sector until mid-2020. More broadly, most analysts expect the Chinese government to increase its stimulus measures in response to the impact on first quarter GDP growth.
The spread of the coronavirus, and the extent to which it will affect the global economy, however, is almost impossible to predict. Instead, the survey works as a tool for forecasting patterns in corporate fundamentals, and for determining the cyclical and structural trends that will shape businesses over the following 12 months. And, in this regard, it has proven to be accurate in the past.
Last year, for example, we forecast that corporate profit growth would slow after the bumper years of 2017 and 2018. And indeed, 2019 turned out to be a year of fairly flat earnings growth for companies globally. However, the survey is concerned with corporate fundamentals, rather than valuations, and the equity market rallied strongly after the US Federal Reserve lowered interest rates at the start of the year. Our analysts also identified China’s slowing economy and global political volatility as key risks to watch. Their concerns were valid. China’s economic growth did slow to 6 per cent in 2019 amid trade tensions with the US, and businesses were affected by street protests from Chile to Hong Kong.
And China is once again in the spotlight. By staying plugged in and listening to management, our analysts can make forward-looking estimates and inform investment decisions, no matter how dark the swan turns out to be.
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