The stock markets have long been a lead indicator of the economy and this clearly points towards a weakening of the economic impulses. But, why would China have such a deep impact on the global economy? Apart from the $5.5 trillion of market cap lost (you can argue that is paper money), there is a real loss of income to the tune of $1.1 trillion. That is likely to have a bigger impact on the global economy.
Coronavirus could lead to a spate of rate cuts
The US Fed had for long been debating between status quo and rate hikes. In the last one month, a rate cut has entered the debate. Fed had cut rates thrice in 2019 to counter the impact of the trade war. What is interesting is that if you look at the probability of a rate hike as indicated by the CME Fedwatch, the probability has gone up sharply from 50% to 75% for June this year. The impact has been quite deep on the US, Europe and Asia and most central banks may cut rates even earlier. Of course, Rabobank has opined that rate cuts and liquidity would do little to change the structural problems with the economy. But, push comes to shove, rate cuts are the low hanging fruits.
China could derail global growth
China is an important link for most countries either as a forward linkage or as a backward linkage. The big hit will be on aviation companies. IATA estimates that the impact of revenue loss due to not flying to China could be as high as $30 billion. Some of the biggest luxury names like Hermes, Burberry, YSL, Versace and Armani have already hinted that they could see deep cuts in revenues and profits due to slack demand from China. Specific companies like Jaguar Land Rover could run out of spare parts to manufacture cars. Larger players like Apple and Boeing rely heavily on China as a manufacturing hub. The world adds nearly $3 trillion worth of GDP each year and 40% of this accretion in absolute terms comes from China alone.
Impact on global commodities demand
If you are wondering why the prices of global commodities are falling, then the answer is the China virus syndrome. China consumes more than 50% of the world’s copper, zinc, aluminium and iron ore. China also consumes nearly 13% of the global oil produced on a daily basis. With oil off take of 14 million bpd, China remains the largest importer and the second larger consumer of crude oil. The recent pandemic has led to a 20% fall in daily oil consumption which explains the sharp 30% fall in crude oil prices in the last few 3 months. The only commodity that is seeing price appreciation is gold; but that is not great news. Gold normally rallies when the going gets tough.
How is the Coronavirus impacting India?
- Indian stock markets are already under pressure and the Chinese virus is impacting the Indian economy in a number of ways.
- Sectors like metals are badly hit because China is normally the leader in determining the demand and the price. With Chinese demand for commodities taking a 20% hit in volumes, this is surely hitting Indian commodity companies.
- There are sectors like pharma and electronics that depend heavily on China for inputs. For example, electronics companies source nearly 70% of their components from China. Similarly, pharma companies rely on China for APIs. With inventories dwindling, these sectors are likely to be the worst hit by the Chinese virus.
- Oil could have a twin impact on Indian markets. Firstly, heavy weights in the oil extraction and refining space will prefer robust oil prices. That ensures sound GRMs and also values inventories higher. However, scores of mid caps benefit from low fuel prices and that had actually led the rally in mid caps in the past. The weak oil prices caused by the Chinese virus may just about bring back interest in mid cap stocks.