The equity markets have taken a bit of a beating over the past week on the backs of the Coronavirus. Some of this is justified, some is not. As per our previous update, this virus continues to have a negative impact on supply chains. Anyone manufacturing in China will be impacted by the slowdown in the supply. The numbers behind the supply have been listed below. In the large picture, the US has a very small percentage of GeoRev (Global Revenue) that comes from China. It is, however, a large overall number. Contrast that with Singapore that has a very high percentage from China, but a relatively small overall number.
We are continuing to see numbers and images that, on their face, look very scary, but when we run the numbers, it is clear they are only looking for headlines. Take the following image that comes to us from Johns Hopkins, a preeminent health care organization:
When I look at this picture, I am pretty sure that the entire continent of China is inflicted with this virus and there is no stopping it. This is right out of a scary pandemic movie where death of the world is immanent. The red area will grow and if [insert favorite movie character here] (Tom Cruise, Brad Pitt, The Rock) doesn’t get the serum, the world will end in the next 24 hours.
Let’s just concentrate on the numbers. The upper left corner says that 82,550 have been confirmed infected. Of that 78,497 are from Mainland China. That is a large number, but if we put it into context, there are approximately 1.4 billion people that live in China, we are looking at 0.000056% of the population. Almost 80,000 people sick, is not a good number, but the graphic above certainly does not depict that.
Other numbers that we are looking at is the overall weight of China in the global economy. The chart below indicates how much growth we have seen over the past 15 plus years. Clearly the industrial complex that is now China means a lot to the globe. We are a very connected world.
It is very hard to measure the overall economic impact on this for several reasons. First, of the 16% of the Chinese impact on the global economy, what % of that is business critical? For example, if cars only got their tires from China, and China stopped all production, how many cars could we sell in the United States? The answer is zero. We generally cannot sell a new car to a customer without four working tires. This would be a binary event. Even though we didn’t have a very small part of the overall product, we could sell no products without it.
Second, how much of the China produced product can be sourced from a country that is not as hard hit as China? South Africa, South America, Mexico, India or even Canada could all take up some of the slack, if they had the production capabilities. It is very difficult to determine the overall slack of production in these countries that could jump in.
Third, will the virus continue to spread and shut down supply chains or will it begin to wane? Given the medical information that we have sourced, we believe that this will spread a bit more, but we will begin to see the growth rates sharply decline. This does not mean the issues go away, but perhaps the scariness of a pandemic starts to wane. If the data on this chart can be believed, we are already starting to see this.
What does this mean as an investor? First and foremost, if we cannot measure it, or predict it, the first inclination is to sell. With scary graphs like the one above, why would you take the risk?
Second, can we be sure the medical community has the right information and the right capabilities to contain this and make sure that is does not spread anymore? Given the size of the planet, and the medical care that is needed to stop the spread of the virus in rural communities in China, this will probably take longer than anticipated.
Third, what information can we trust? Given the near ubiquitous nature of the “stuff” we see on our computer screen, how can we test the veracity of it? Twitter, Facebook, Instagram, SnapChat are all saying something about the virus. What is true, what is not? Our information age longs for the truth, not crazy information that cannot be relied upon. This will keep partially informed investors very cautious as they read through some of the reports.
Our overall view is that this will slow down growth more due to the supply chains keeping manufacturers at bay. We are continuing to monitor the situation and will be making portfolio adjustments and rebalances as the market gives us opportunities.
As always please let us know if you have any questions. Thank you for your continued support.
February 27, 2020