Dear Reader,
Preliminary data on the impact of the coronavirus (COVID-19) on economies this month are out. Japan’s flash Composite Purchasing Managers Index (PMI) for February has come in at 47, much below January’s 50.1. A reading below 50 indicates contraction from the previous month. The fall is at least in part due to COVID-19, with tourism hit particularly hard.
Similarly, Australia’s flash composite PMI for February shows activity shrank to 48.3, down from 50.2 in January, with bushfires and the virus contributing to the decline.
The silver lining is the Flash PMI for the Eurozone came in at a six-month high, indicating that the region has so far remained immune to the effects of the virus.
As for China, its Emerging Industries PMI (EPMI), a gauge of momentum in high-tech industries, slumped to a historic low of 29.9 for February, a huge fall from 50.1 for January. A Nomura research report said, “By adjusting for seasonality and expected progress in business resumption in the coming week, we estimate the official manufacturing PMI could drop to a range of 30-40 in February. We believe markets might underestimate the scale of the current growth slump.”
The question is: will the recovery be V-shaped? Chinese authorities say there has been a resumption of 80 per cent of work in key foreign enterprises in many regions. The credibility of the pronouncements of Chinese authorities is even less than its normal dismal level at the moment, but Foxconn has said it will ‘cautiously’ resume production, while Apple issued a revenue warning for the quarter.
The virus has spread to Beijing, with a report saying that infection density in Xicheng district, which houses the headquarters of the Chinese Communist Party and government offices, is only slightly lower than in Wuhan, the centre of the epidemic. Talk about ironic twists of fate!
Nevertheless, a torrent of cash continues to flood into markets around the globe. Indeed, as on 20th February, the MSCI China index was up 1.8 percent year to date. Virus? What virus? That’s what Chinese equities seem to be saying. Other markets in the region have fared far worse, with MSCI Japan, Taiwan, Korea, Thailand, Indonesia, Malaysia and the Philippines all in the red compared to the beginning of the year. The Chinese government has been doing a good job of making stock markets defy gravity.
No wonder the Wall Street Journal printed an article headlined ‘China is the Real Sick Man of Asia’ with the strapline ‘Its financial markets may be even more dangerous than its wildlife markets.’ The nub of the article: ‘Given the accumulated costs of decades of state-driven lending, massive malfeasance by local officials in cahoots with local banks, a towering property bubble, and vast industrial overcapacity, China is as ripe as a country can be for a massive economic correction. Even a small initial shock could lead to a massive bonfire of the vanities as all the false values, inflated expectations and misallocated assets implode.’ China expelled three WSJ journalists for that report.
There are signs that some investors are seeking safe havens. The United States 10-year government bond yield has dropped below 1.5 percent, while gold prices have rebounded. The US dollar has moved sharply higher, which is usually bad news for emerging market equities.
To be sure, the Chinese authorities will throw everything at the virus. They have cut monetary policy lending rates modestly, keeping their firepower in reserve. They too know that monetary policy can do little to get people out of their homes into their workplaces. That is why they’re offering subsidised transport and rewards for migrant workers to return to work.
