• Global Markets Finally Follow Asia’s Lead on Covid-19

    The coronavirus has finally infected global markets over the last two weeks. It’s taken a while to fester. But the outbreak has now spread from China’s CSI 300 to Asian, European and, finally, U.S. stocks.

    I’ve been warning since Jan. 21 that a mystery SARS-like disease was hitting China, and likely to spread globally. The World Health Organization was due to meet the next day to decide if the outbreak is a “public health emergency of international concern.” I pre-empted that the answer is “Yes.”

    The WHO ruled “No.” The Wuhan coronavirus is an emergency only for China, the global health body ruled on Jan. 22. How wrong they were.

    Investors worldwide have had more than a month to prepare for this week’s selloff on global markets. Even while car factories in South Korea, Japan and Serbia were shuttered because they couldn’t get parts, U.S. stocks climbed toward all-time highs. Now the reality of worldwide manufacturing pain is sinking in.

    Jaguar Land Rover’s CEO, Ralph Speth, expects the company to run out of some parts shortly. The British carmaker, a Tata Motors (TTM) subsidiary, says it has “flown parts in suitcases from China to the U.K.”

    Isaac Larien, the CEO of Bratz dollmaker MGA Entertainment, says it has enough Chinese parts for another month. “The timing couldn’t be worse,” he told The Washington Post. “In 41 years in the toy business, this is the worst disaster I’ve seen.”

    So I’ve been surprised it has taken this long for investors outside greater China to respond. Yes, China’s financial markets are ring-fenced, so there’s little direct connection from its A shares to other equities. But this infection in the “factory to the world” has had a severe effect in China, and I believe the supply-chain pain has only just begun.

    Korean shares have fallen 18% since mid-February. Japanese stocks turned south earlier, but are now down 22.9% since the start of the year. Hong Kong stocks saw a short-lived rally, but are off 16.3% since virus concerns first got real in mid-January. So the radius of stock-market pain is expanding.

    Nomura estimates today that 74.1% of Chinese businesses have resumed work after the Lunar New Year lockdown, and only 61.6% in the worst-affected areas. They base that off the Baidu Migration Index, which shows 49.2% of China’s population has returned to where it was pre-virus. Most migrant workers, in other words, have stayed put.

    By the end of March, 91.8% of businesses outside Hubei Province should be operating, the Japanese investment bank predicts — quite optimistically, if you ask me. This crisis has already defied expectations.

    Early comparisons looked at the impact of SARS in 2003. It made sense because the diseases are quite similar. SARS was short-lived, a deadlier virus that nevertheless only resulted in 813 fatalities globally. Economists and market watchers globally raced to release reports about a similar “V-shaped recovery” from Wuhan Acute Respiratory Syndrome.

    Given enough time, all recoveries are V-shaped. This is a little like warning that markets will be volatile. Yes, the WARS effects will not continue forever, and China’s economy is not going to slide into permanent decline. What’s yet to be determined is how deep and wide the V is.

    It’s understandable that economists have been slow. They are better at explaining what’s happened than predicting what’s to come, particularly with an unpredictable disease. Yet simple math should have suggested a sizable impact from the Covid-19 virus hitting right as much of China was on the move for the most-important holiday of the year.

    China has a much greater importance to the global economy now than in 2003. The Middle Kingdom’s economy stands at $14.2 trillion for 2019. It was one-quarter the size, $3.6 trillion, when SARS hit. China only began its economic opening up in earnest in 1997. So the country has also become far better-integrated into the global supply chain.

    Likewise, common sense should have told the WHO to act earlier. Many people in Hong Kong fault the organization as being beholden to Chinese funding. I’m not sure if that’s accurate, but the body has certainly bent over backward to praise China for its response, criticizing the rest of the world for lacking preparedness instead.

    Not every nation can respond as China has, by locking down large proportions of its population. Nor should they.

    Chinese authorities have carried out a remit to “round up everyone who should be rounded up,” a random dictum that’s sounds a lot like rounding up the usual suspects. As a result, authorities in the county of Tongbai have been training SWAT teams to noose, then hood uncooperative suspects who refuse to wear a mask. Each Chinese province is unleashing tens, even hundreds of thousands of tin-pot Communist Party local representatives or uniformed volunteers, based on a block-level grid system. Each one has their own crazy way of outcompeting the other to win what President Xi Jinping calls an all-out “people’s war” on the virus.

    Consider the confusion in Wuhan. On Monday, the city government said non-residents were free to leave the city if they weren’t infected or under quarantine. By noon, that advisory was withdrawn. The city’s top brass said the announcement was “unauthorized,” and there was no change in the lockdown.

    As a result, China is as much at war with its own people as the virus. Even after the immediate virus crisis passes, it may take months for those block-level dictators to relinquish their hold on the people and allow life to get back to normal. For now, you have “escapees” shinnying down drainpipes from five floors up just to get out of their apartment blocks if they don’t have the right “hall pass.”

    The way the virus has popped up with pockets of infection in South Korea, Iran and Italy has been strange. But it suggests we may need to get used to the Covid-19 virus being a way of life, worse than the flu, a dangerous pneumonia, but something people learn to coexist with.

    The WHO may be right that most nations are not prepared for that eventuality. The H1N1 swine flu, essentially a new and nastier but normal influenza bug, sent 60.8 million Americans to hospital and killed 12,469 of them, according to the Centers for Disease Control. Its worldwide mortality was a whopping 151,700 to 575,400 people, the vast majority young people in Southeast Asia and Africa.

    Honestly, I don’t remember H1N1 all that well. It certainly doesn’t stick in the brain as something that killed half a million people. Here in Hong Kong, SARS and its 298 deaths in this city carries a lot more cultural resonance.

    It appears Wuhan pneumonia is going to have far greater impact, both practically and culturally. Just as they should take reasonable precautions over their own health, investors should start assessing public companies for their exposure to the supply-chain effects of Covid-19.

  • What the Hitchhikers Guide to the Galaxy Has to Say About Covid-19

    Global stock markets have now shed US$5 trillion in value in response to the Covid-19 coronavirus. Starting to get alarmed yet?!

    Fall back to the advice “Don’t Panic.” I was eight when one of my favorite novels, The Hitchhikers Guide to the Galaxy, came out in 1979. On the cover of that guide, a kind of Lonely Planet for all the planets, are those two reassuring words. We’re told they appear in “large, friendly letters” on a “small, thin, flexible lap computer.”

    The hitchhikers guide, a kind of Wikipedia that predated the Internet, has a humorous entry about the planet Golgafrincham. Bear with me, there’s a point here in the end.

    [This story originally appeared in Real Money on TheStreet.com. Click here to see the original story.]

    Golgafrincham’s poets were fond of making up stories about how the planet was going to end. Maybe it would be as a result of it crashing into the sun, or the moon crashing into it, or 12′ piranha bees. A tale that it was about to be eaten by a mutant star-goat got its residents to organize three arks: Ark A of leaders and scientists; Ark B of useless people like hairdressers, middlemen and telephone sanitizers; and Ark C of the little people who made stuff and got stuff done. Ark B took off first, sent toward a distant insignificant planet, which turned out to be our prehistoric Earth. The wise folk in Arks A and C stayed put after they got rid of the useless people. Tragically, those Golgafrinchans who remained all died out from an infectious disease contracted from an “unexpectedly dirty” telephone.

    Is this our dirty telephone? No, we are the middle managers, lawyers, hairdressers, phone sanitizers. The useless ones. These are 12′ piranha bees. We’re saved!

    Back to reality. There are so many unknowns surrounding this disease. I’ve been living with it here in Hong Kong since early this year, having survived through SARS in 2003, too. I caution investors who are worried about the health of themselves and their portfolios to keep a calm head.

    Strangely, it has been the sudden emergence of clusters of the disease in South Korea, Italy and Iran that has spooked the markets. These clusters have people the world over rushing to buy industrial-strength face masks, stock up the hand sanitizer, panic-buy canned goods.

    Here in Hong Kong, people have been stockpiling rice (which mainly comes here from Thailand, not China), and toilet paper, because a tabloid story said all the toilet paper factories in China would start making masks. I stood today behind an elderly lady buying a US$1 bag of bread, who compulsively reached for the huge stack of toilet paper standing by the checkout. She hesitated, didn’t buy in the end. I could a thought bubble, “If it’s run out, then why is there this huge stack?!”

    What investors should be worrying about is the fact that China essentially shut down for more than a month. I’m sorry that almost 3,000 people have died. I’m sorry almost 84,000 people are infected. Here in Hong Kong we have 94 cases, which is 0.001% of the population. Last year, 34,157 Americans died of the flu.

    So yes, I am avoiding taking public transportation, and I wear a mask when I’m going to very crowded places. I wash my hands, a lot. But I’m not wearing a mask non-stop. I bet a lot of those 94 infected people wore masks, but took them off at group meals, an apparent source of many infections. If I do get the Covid-19 virus, as a healthy Gen Xer, there’s every chance I’ll survive.

    Global manufacturing is going to be stumbling to correct for parts failing to arrive for months to come. Eventually that is going to spill over to other sectors: it’s not much good buying Microsoft (MSFT) shares if Lenovo (LNVGY) has stopped making computers.

    Markets hate uncertainty, that’s the cliché, and the situation we find ourselves in is full of them. South Korea now counts 2,337 cases, the most outside China, but at least the Korean peninsula shares an extensive border with China. How it cropped up in Iran and Italy in large numbers is a mystery, and that’s what seems to have finally punctured the protective bubble around investors.

    You know the numbers. The S&P 500 has entered technical correction, a drop of 10% or more, faster than ever before. In six trading days, it has come off 12% since last Wednesday’s record high. A record high, one month after Wuhan broke out! We’ll see a few more records broken before this is all over, I’d imagine. The Dow’s 1,191-point fall on Thursday was also a new single-day high.

    Asian equities are also ailing. This has been a brutal last trading day of the month, with Japan’s Topix down 3.7%, China’s CSI 300 down 3.6%, Korea’s Kospi down 3.3%, a similar fall for Australia’s ASX 200. These are large single-day falls for markets that have generally been selling off since mid-January.

    Not since the Lehman Brothers crisis have we seen such selling. Of course, all asset classes are going to have to contend with virus fallout. Are equities more at risk because they had climbed so high?

    Analysts at Goldman Sachs (GS) are predicting that members of the S&P 500 will post no earnings growth at all in 2020. That’s a compound effect from the severe decline in China’s economy, resultant disruption in global supply chains for U.S. companies, and eventually a slowdown in the U.S. economy itself, which is 68% driven by consumer spending.

    That seems like a sensible path of calculation. The blanket panic selling, however, isn’t wise. Equally, I think it would be incredibly sad if the Tokyo Olympics this summer got called off.

    Bargain-hunting investors should not step into the markets now. There is too much uncertainty, and above all too much herd panic. Day traders on the other hand may find these happy hunting times. Shareholders should be holding companies to account for their exposure to Chinese manufacturing disruption, and chaos in supply chains.

    The Hitchhikers Guide has little to say about Earth as a whole. “Mostly harmless” is its entire entry. Covid-19 is a nasty pneumonia, certainly not harmless. But investors should for now fear manufacturing sickness above any infected telephone.

  • Asia Assesses Costs as Nations Bar Boeing’s 737 Max From Airspace

    China, home to 22% of the 737 Max planes in operation so far, was the first nation to ground the plane.

    This story first ran on TheStreet.com’s subscription service.

    Airlines and industry in Asia are busy figuring out what the grounding of the 737 Max 8 planes made by The Boeing Co. (BA) means to their order books, flight paths and bottom line.

    China was the first nation of 42 globally to order all 737 Max 8 planes to keep their wheels on the ground. It is home to 22% of the 350 aircraft of that model delivered around the world for service to date. Boeing has received 4,661 orders for the planes, according to the brokerage Nomura.

    The main Chinese airlines with those planes now suspended from operation are Air China Ltd.  (AIRYY) , China Eastern Airlines Corp. Ltd. (CEA) and China Southern Airlines Co. Ltd.  (ZNH) . Shandong Airlines SH:200152, and the unlisted carriers Shenzhen Airlines and XiamenAir, also fly the plane.

    Singapore has barred all Boeing 737 Max flights from its airspace. That effectively grounded all six of that aircraft for SilkAir, the Asia-specialist wholly-owned subsidiary of Singapore Airlines Ltd. Singapore Airlines  (SINGY) itself does not operate any of the planes.

    India has likewise grounded any 737 Max planes in service with its carriers. Jet Airways Ltd. BOM:532617 and SpiceJet BOM:500285 are the Indian airlines affected, although India is not allowing any of those models into its airspace.

    Australia, Hong Kong, Malaysia, New Zealand and Vietnam have joined 35 other nations, most of them in Europe, in temporarily barring 737 Max 8 flights from their airspace even though their carriers don’t fly the plane.

    South Korea has grounded the two planes of that model flown by budget carrier Eastar Jet, and Mongolia has taken the same action with the sole version of that plane flown by MIAT Mongolian Airlines.

    The biggest effect of the bans in my part of the world is felt by unlisted Lion Air, which has taken delivery of 14 of the planes. That includes the plane in question on Lion Air Flight 610, which crashed into the Java Sea on October 29, 2018, killing all 189 on board.

    Indonesia has ordered the grounding of all 737 Max 8s, covering the 13 remaining Lion Air planes and the single plane of that model in service with national flagship Garuda JK:GIAA, which at one point had such an appalling safety record it was barred from flying to the European Union.

    The second flight disaster to feature a Boeing 737 Max 8 is of course Sunday’s crash of Ethiopian Airlines Flight ET302. Ethiopian Airlines has grounded its remaining four 737 Max 8 planes.

    The fact the Lion Air flight nosedived into the sea 12 minutes after leaving the Jakarta airport on route for Bangka Island has an eerie counterpart in the crash in Africa, where the jet climbed erratically and then crashed six minutes after departing Addis Ababa for Nairobi.

    In both flights, the pilot reported trouble immediately after takeoff. With the Lion Air flight, the nose dipped down dangerously more than two dozen times, and information from the “black box” data recorder shows the pilots were trying to wrestle control of the plane from its system.

    Both investigations are now examining maneuvering characteristics augmentation system, or MCAS, installed on the two crashed planes. In the case of the Lion Air flight, the plane’s computer received faulty sensor data that led the computer to believe the plane had stalled. That then caused the MCAS system to push down the nose, to avert the non-existent “stall.”

    Cathay Pacific Airways Ltd.  (CPCAY) , Japan Airlines Co., Ltd.  (JAPSY) and All Nippon Airways (ALNPY) do not fly the 737 Max. ANA says it is not, so far, suspending orders for 30 of the planes, pending any findings from the investigation in Ethiopia.

    Among Southeast Asian airlines, Vietnam Airlines does not yet fly any of the 737 Max planes, but the carrier has 100 on order. Lion Air has 187 on order, and Garuda another 49.

    The Singapore-based aircraft leasing company BOC Aviation HK:2588, the largest of its type in Asia, has five operational 737 Max aircraft that are now grounded, and another 82 on order.

    AirAsia (AIABF) and its long-haul subsidiary AirAsia X don’t fly that model of plane, and neither do Thai Airways BKK:THAI, Bangkok Airways BKK:BA or Cebu Pacific CEBUY. Nok Airlines BKK:NOK in Thailand has six 737 Max on order, but isn’t yet flying any.

    Nomura notes that AirAsia in particular stands to gain from the temporary grounding of the fleets of Lion Air and SilkAir, since it flies many of the same routes. SilkAir, which had been awaiting delivery of another 32 737 Max 8s, says the grounding of its planes will disrupt its schedules. It continues to fly 17 Boeing 737-800NGs, which it says are not affected.

    Nomura also warns of the potential fallout if customer sentiment turns against the Boeing 737 Max. Airlines could attempt to cancel the 4,661 orders for that plane with Boeing, and lack of delivery could lead to short-term scheduling issues. Boeing delivered around 140 of the planes last year.

    The Indonesian arm of AirAsia suffered its own disaster in December 2014 when Flight 8501 crashed into the Java Sea, killing all 162 on board, after departing the Javanese port city of Surabaya on route to Singapore. The plane in question was an A320 made by Airbus SE (EADSY) .

    Manufacturers are also assessing any impact from the double 737 Max disasters. The Japanese chemicals company Toray Industries, Inc.  (TRYIY) sells carbon fiber as a secondary structural material for use in Boeing 737 Max planes.

    Although more of the company’s fiber is used in making Boeing 777 and 787 planes, Toray’s fiber sales related to this plane model are around ¥2 billion to ¥3 billion (US$18 million to US$27 million), Nomura notes. Toray should be able to absorb the hit to sales and operating profits, the brokerage says.

  • AirAsia Maverick Turns Venture Capitalist to Seed Southeast Asia

    Fast cars, fast planes, fast football (of the British kind) — and now, fast money. Tony Fernandes has always had a maverick streak.

    Asia’s answer to Richard Branson, the billionaire behind the Virgin empire, Fernandes has taken pride in taking on the big boys in aviation, and winning. Now the co-founder of AirAsia (AIABF) is taking on Silicon Valley.

    Like SoftBank Corp.’s (SFTBY) founder Masayoshi Son, Fernandes is a self-made pioneer in Asia, a continent known for its family money more than its entrepreneurs. And like Softbank and Son, he is now setting up a venture-capital fund to invest in startups.

    Neither 21st century tycoon exactly shuns the spotlight, either. SoftBank, backed by billions in Saudi funding, has aspirations to take on the world through its Vision Fund.

    AirAsia’s aim is more modest, and set squarely on its home market in Southeast Asia, a grounded and sensible start.

    AirAsia transferred its digital businesses into a new entity, RedBeat Ventures, in the middle of last year. It announced this week that it will partner with arguably Silicon Valley’s most-successful accelerator, 500 Startups, and set up a venture-capital fund, RedBeat Capital.

    AirAsia is Asia’s most-successful budget airline. In a continent where collusion between “rivals” on prices and routes has been commonplace, it has fought for a place for itself by flying out of secondary airports in major cities to keep costs down.

    That works, and then some. AirAsia reportedly has the lowest operational costs in the world for an airline, with a unit cost, per available seat kilometer, of 3.5 U.S. cents. That means it breaks even if its flights are only half-full (52% full, to be precise).

    RedBeat Capital will be based in San Francisco, and will seek to “develop a travel-technology ecosystem,” according to Fernandes. Its remit is to find startups worthy of investment in travel, lifestyle, logistics and fintech for Southeast Asia.

    Click here to read the rest of the story on Real Money at TheStreet.com.

  • 5 Gray Swan Shocks On the Horizon In 2018

    5 Gray Swan Shocks On the Horizon In 2018

    The Japanese investment bank Nomura (NMR) has 10 “gray swans” to watch out for in 2018. Unlike their cousins the black swans, which simply pop out of nowhere and therefore can’t be predicted, gray swans aren’t hidden or invisible, just largely ignored. At our peril, it seems.

    They are topics that aren’t widely discussed, the bank says — not the question of what to do over North Korea, or whether nationalists will triumph in the Italian elections.

    I’ll tackle the first five in this story and revisit the gray-swan family by addressing the other five in a second piece.

    Continue reading

  • Trump Takes on China in Trade, but Is Wrong With His Attack

    Trump Takes on China in Trade, but Is Wrong With His Attack

    U.S. President Donald Trump stood side by side with Chinese President Xi Jinping on Thursday, despite the fact that Trump continues to depict — wrongly — the China-U.S. trade relationship as toe-to-toe.

    That relationship is “one-sided and unfair,” Trump said in a joint address in Beijing. There’s the “shockingly high” trade deficit to consider, he explained. There’s also the $300 billion in the theft of U.S. intellectual property and forced technology transfer that the United States suffers every year, per U.S. government figures.

    Trump has, to be fair, delivered on this, the most-important trip of his presidency. He has conveyed more precisely in person his message that the United States is disadvantaged by its trade with China and Japan. He’s wrong, but he’s right to express himself so clearly when he previously fudged the point when meeting the leaders of those countries on home soil.

    At least he won applause from the assembled Chinese and U.S. executives in attendance to hear the two leaders speak. It was for a back-handed compliment.

    “I don’t blame China,” Trump conceded, pausing when clapping began. “Who can blame a country for being able to take advantage of another country for the benefit of its citizens? I give China great credit.” Cue more applause.

    Continue reading