Reports from China show COVID-19 is having a significant impact on the country’s economy. According to the China Passenger Car Association, car sales have plummeted by 92% during the first two weeks of February. A survey of small and medium sized businesses conducted by the Chinese Association of Small and Medium Enterprises revealed that over 85% of respondents believe they will run out of cash in less than 3 months. The IMF believes the epidemic will reduce China’s growth rate to 5.6%, the first sub-6% reading since 1990.
The world’s largest companies are struggling to quantify the potential impact from COVID-19. Since China alerted the World Health Organization that dozens of people had fallen ill to an unusual pneumonia in Wuhan on December 31, 125 of the 150 largest companies in the world have reported earnings. According to our analysis of the 125 quarterly reports and subsequent investor calls with analysts, just 6% have quantified its impact. These companies have reduced quarterly earnings guidance by approximately $220 million due to COVID-19 demand or supply disruptions. For perspective, this figure represents less than 0.03% of the group’s trailing 12-month earnings.
Just under half of the companies have mentioned COVID-19 in their earnings reports or on investor calls. As Chart 1 shows, COVID-19 first appeared in earnings reports in mid-January (prior to this, most companies principally concerned with the U.S.-China trade war). Now virtually every earnings report mentions COVID-19.
Over 15% are experiencing reduced demand or see the possibility of reduced demand and 12% noted current or potential supply chain disruptions.
Representing over 50% of the total market capitalization of the MSCI World Index, most of these multinationals either sell directly to Chinese consumers (according to Factset, revenues from China average 6% for the group) or count on Chinese manufacturing as an important part of their global supply chain. Even with many of these companies having dedicated crisis response teams tasked with monitoring the virus, it is simply too recent and moving too fast for management teams to quantify its impact.
One only needs to look at Apple to understand how quickly things are moving. On its January 28 earnings call, Tim Cook said, “we’re closely following the development of the coronavirus.” On February 17, Apple announced it would not meet previous revenue guidance due to the virus’s impact on iPhone production and the continued closure of all Chinese stores.
Our view is that COVID-19 will have a temporary but potentially deeper than expected impact on the global economy. As we noted in our last two quarterly newsletters, global economic growth was already deteriorating sharply before the virus appeared. The direct and indirect consequences might be more severe as many economies around the world are now facing negative or low-single digit real GDP growth.
With only 7% of the largest companies in the world quantifying the impact of the virus, investors need to be mindful that COVID-19 has not been incorporated into earnings expectations. Should the spread of the virus worsen in China, other countries critical to global trade such as South Korea and Japan, or curtail global business and leisure travel, downward earnings revisions could shock investors. As we wrote in a recent article, global growth expectations embedded in stocks is already near an all-time high—we would not be surprised to see a meaningful correction if earnings expectations fall as the global growth outlook deteriorates.
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