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Daily Intelligence Briefing

Monday, February 3, 2020

Identifying Change-Driven Investment Themes – Five sections, explained here.

We bring you our Daily Intelligence Briefing courtesy of McAlinden Research Partners. The report is provided to Hedge Connection members for free. Below is snapshot, login to view the full report. Not a member? Join today. McAlinden Research Partners is offering a complimentary one-month subscription to receive the Daily Intelligence Briefing – to Hedge Connection clients/friends. Activate yours by contacting Rob@mcalindenresearch.com and mentioning “Sent by Hedge Connection”

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Here are the Market Winners & Losers of Coronavirus →

Summary: The coronavirus outbreak aka 2019-nCoV is having an outsize impact on some industries and their share prices. Airline, energy, and gaming stocks are getting battered while stocks of medical gear suppliers are soaring through the roof.  Read more +

Source material for today’s market insight…

Medical Equipment: China goes global in search for protective suits, masks and goggles as coronavirus infections begin to take off

Medical Equipment: Face mask shortage hits Europe and US as coronavirus spreads

Medical Equipment: Shares of 2 Japanese Companies Are Spiking as Coronavirus Spreads

Medical Equipment: Coronavirus outbreak boosts rubber gloves and surgical shares

II. Updates of Themes on MRP’s Radar

Follow-up analysis of key market drivers monitored by MRP.

China Markets: China counts economic cost of virus as row deepens over travel ban

China Economy: At Least Two-Thirds of China Economy to Stay Shut Next Week

Work & Productivity Apps: Coronavirus Forces World’s Largest Work-From-Home Experiment

Gaming: China’s coronavirus crisis empties Macau’s mega casinos

Oil: China Oil Demand Has Plunged 20% Because of the Virus Lockdown

Healthcare & Pharma: There’s Another Virus Stalking America: It’s Called the Flu

Healthcare & Pharma: Artificial intelligence-created medicine to be used on humans for first time

Healthcare & Pharma: Major conglomerates 3M, GE, Philips bet on healthcare

III. Joe Mac’s Viewpoint

Founder Joe McAlinden’s big-picture analyses of macro issues. More about him here.

January 31, 2020: 2020’s Emerging Market Opportunity →

December 23, 2019: A Review of MRP’s Change-Driven Themes →

November 27, 2019: Emergence of Divergence →

October 31, 2019: Receding Recession Fears →

IV. Active Thematic Ideas

MRP’s active long and short themes, with an archive of follow-up reports.

See Them Here →

V. Macroeconomic Indicators

Key data releases relevant to MRP’s Active Thematic Ideas.

See Them Here →

TODAY’S MARKET INSIGHT

Here are the Market Winners & Losers of Coronavirus

Summary: The coronavirus outbreak aka 2019-nCoV is having an outsize impact on some industries and their share prices. Airline, energy, and gaming stocks are getting battered while stocks of medical gear suppliers are soaring through the roof

Chinese equity markets fell over 8% today, which happened to be their first trading session since January 23 when the extended Lunar New Year break began. More than 3,000 stocks, or over 80% of all Chinese shares listed on the country’s two major stock exchanges in Shanghai and Shenzhen saw trading suspended after hitting China’s daily limit that caps gains and losses to 10%.

The plunge erased more than $400 billion in value, dealing a blow to the country’s 150+ million retail investors. They account for the majority of China’s stock investors, in contrast to the United States, for example, where institutions are the major investors. Still, market experts had been bracing for a bloodbath so the decline came as no surprise. The actual loss of 8% was lower than the 10% decline that had been anticipated.

That anticipation of volatility, along with the PBOCs $173 billion liquidity injection, helped to stem losses in other Asia-Pacific markets. Japan’s Nikkei fell just -1.01% and South Korea’s Kospi lost -0.01%. Similarly, the benchmark indexes in Taiwan, Singapore and Australia declined -1.22%, -1.19%, and -1.34%, respectively. Hong Kong’s Hang Seng Index actually close up (+0.17%).

But while stock markets have reopened, most provinces are extending the holiday to try to contain the virus. Fourteen Chinese provinces and citie have said businesses need not start operations until at least the second week of February. According to Bloomberg, these fourteen provinces accounted for almost 69% of China’s GDP in 2019, and 78% of the country’s exports in December last year. Those same provinces also account for 90% of copper smelting, at least 60% of steel production, 65% of crude oil refining and 40% of coal output, which explains why commodity prices are faltering.

Because of the virus lockdown, travel restrictions, and widespread avoidance of face-to-face contact, some sectors of the market are taking a bigger hit than others. Airlines, tour operators, retailers, manufacturers, and gaming companies have experienced major operational disruptions or loss of sales over the past month. A multinational like Starbucks (SBUX), for instance, has had to shut more than half of its stores in China — the company’s most important growth area — amid the outbreak.

Airlines

Meanwhile, China is facing increasing international isolation due to restrictions on flights to and from the country and bans on travelers from China. On almost every continent, countries have taken the dramatic step of closing their borders 
to most, if not all, flights from China, or to foreign visitors who’ve been to China or certain parts of it.

These bans run counter to the official advice from the World Health Organization (WHO), which has declared the outbreak a public health emergency of international concern but says travel bans are unnecessary and damaging. Within China, nearly 20% of domestic flights are being canceled. These restrictions will weigh on airline stocks, whose values have plunged in the wake of the virus.

Energy
Chinese oil demand has reportedly dropped by about three million barrels a day, or 
20% of total consumption, because of disrupted economic activity. It is not just factories that have stalled production. Domestic consumption has also plunged, with movie theaters, amusement parks, and cafes shut down, and people staying home out of fear of infection.

China is the world’s largest oil importer and consumes about 14 million barrels a day — equivalent to the combined needs of France, Germany, Italy, Spain, the U.K., Japan and South Korea. Any change in consumption therefore has an outsize impact on the global energy market. The price of Brent, the global oil benchmark, has fallen about 14% since January 20 and is headed for the lowest close in a year. The impact is not just negative for oil producers, it is also hurting refiners because demand for gasoline and jet fuel has dropped as well.

Gaming

The crisis has emptied casinos in Macau, the world’s biggest gambling hub during what is normally peak season. Chinese visitors normally account for about four-fifths of customers at Macau’s casinos. However, the number of visitors to Macau from mainland China during this year’s lunar new year period fell by more than 90%, compared to last year.

The decline in visits is a big deal for gaming companies like Wynn Resorts (WYNN) and Las Vegas Sands (LVS), as they derive two-thirds or more of their revenues from Macau casinos. More than $18bn has been wiped off the market value of the Macau operations of Wynn, MGM and LVS since the start of the epidemic.

Medical Equipment

In the midst of all this, one sector is seeing a windfall: Medical equipment . Demand for medical gear such as protective attire, surgical masks, rubber gloves, and even infrared cameras that are used for screening passengers at airports is off the charts currently. Retailers, manufacturers and pharmacies are seeing these products fly off the shelves.

The demand is coming from private individuals as wekk as health services organizations. The Chinese government estimates that 100,000 pieces of gear are needed every day in Hubei province alone, but Chinese suppliers can only meet a third of that demand. Elsewhere in China and other Asian countries, people are stocking up on disposable medical masks, even when there’s no evidence to suggest the product they are buying works to protect against airborne viruses.

This resulting shortage has forced the Chinese government to turn abroad for help. South Korea and Japan have collectively sent at least 3 million masks to the Chinese mainland along with sets of hundreds of thousands of goggles and protective suits.

The buying frenzy is spilling into markets as far as the UK and US, where online retailers, manufacturers and pharmacies are also selling out of products. One UK based supplier experienced two years’ worth of demand in one week. Even CVS, an American pharmacy chain with about 9,900 stores across the US, has run out of supplies. Manufacturers are scrambling to increase production to meet the shortfall.

Investors, capitalizing on this theme, have been buying shares in companies that could benefit from higher demand for medical products. Japanese companies that supply some of the items listed above are among the biggest beneficiaries.

They include Azearth (3161.T), a supplier of protective attire of the kind used in hospitals; Airtech Japan (6291.T), which sells air purifying products; Shikibo Ltd. (3109.T), which produces anti-virus masks; and Nippon Avionics (6946.T), which makes infrared cameras.

The share prices of these companies have risen between 19% and 187% within one month. Kawamoto Corporation (3604.T), another Japanese manufacturer in this space, has seen its stock price surge a whopping 700% over the same period. Stocks in other markets are benefitting as well, including Indonesia’s Kossan Rubber Industries Bhd (7153.KL) and Supermax Corporation Berhad (7106.KL).

As of Monday, February 3, nearly 17,500 cases of the infection have been confirmed worldwide, and that number is growing daily. That means, medical equipment companies will continue to outperform until signs of containment emerge, at which point some stocks that soared too high and too fast might crash.

Nelly Nyambi
Managing Director, Research
McAlinden Research Partners

Medical Gear Stocks vs US Medical Devices vs S&P 500

Source material for today’s market insight…

Medical Equipment

China goes global in search for protective suits, masks and goggles as coronavirus infections begin to take off

 

China has turned to the global supply chain for medical equipment including protective clothing, masks and goggles as pressure on health services fighting the Wuhan coronavirus grows. In Beijing, the Ministry of Industry and Information Technology estimated that Hubei was in need of 100,000 pieces of protective clothing and equipment every day, but that the country’s 40 manufacturers could only produce 30,000 items a day.

 

UNICEF, South Korea, Japan and Chinese embassies were shipping humanitarian aid to China. Six tonnes of supplies were sent from UNICEF’s stores in Copenhagen, Denmark, bound for Wuhan. South Korea sent 2 million masks, 100,000 sets of goggles and 100,000 protective suits by a charter plane on Thursday, Seoul said. Japan sent 1 million masks.

 

Read the full article from The South China Morning Post +

Medical Equipment

Face mask shortage hits Europe and US as coronavirus spreads

 

An acute shortage of face masks in Asia caused by fear of the spreading coronavirus has found its way west, with online retailers, manufacturers and pharmacies in the US and UK selling out of the products in the past week.

 

US group 3M, which supplies the popular N95 respirator, said it has increased production and is “working with distributors to help ensure they have inventory to meet end-user demand”. The Minnesota-based company added that the wildfires in Australia and a volcanic eruption in the Philippines before the coronavirus outbreak had added to supply pressures.

 

SP Services, a UK-based first aid equipment supplier, has experienced two years’ worth of demand in the past week and is looking to source masks from a wider pool of suppliers. The Cambridge Mask Company, a UK-based group which manufactures and sells military-grade filtration masks, is also facing unprecedented demand. Having received requests for orders from companies based in countries including France and Puerto Rico ranging between 500,000 to 10m products, the company has completely sold out.

 

Read the full article from The Financial Times +

Medical Equipment

Shares of 2 Japanese Companies Are Spiking as Coronavirus Spreads

 

Shares of Japanese companies Kawamoto and Azearth have spiked as the coronavirus spreads. Hospitals and pharmacies have been running out of [face] masks during the outbreak.

 

The stock of Kawamoto (3604. Japan), a Japanese medical supply company that makes masks, has jumped 479% this year, experiencing a particularly large spike around Jan. 17 when the outbreak began receiving more attention. Shares of Azearth (3161. Japan), another Japanese company that makes protective clothing used in hospitals, have also roughly doubled since mid-January.

 

There has also been a run on face masks in the U.S., where the virus has also begun to spread. Both Honeywell (HON) and 3M (MMM) are ramping up production of masks because of the demand.

 

Read the full article from Nasdaq +

Medical Equipment

Coronavirus outbreak boosts rubber gloves and surgical shares

 

Shares in Asian businesses that make rubber gloves and other surgical equipment have been boosted by the outbreak of a deadly coronavirus in China. The outbreak has seen investors pile into stocks such as Malaysia’s Top Glove, which manufactures more than 70bn pairs of rubber surgical gloves a year. The company’s Kuala Lumpur-listed stock has climbed almost 14 per cent in the past two days, boosting its market capitalisation by $370m.

 

Kossan Rubber Industries and Supermax Corp, two other Malaysian companies that make latex gloves, jumped more than 6 per cent and 8 per cent on Wednesday, respectively. Shanghai-listed Zhende Medical, which makes medical supplies, has risen by more than 33 per cent this week.

 

Strategists have said that the rising share of consumer spending that is done online, could mitigate the effects of shoppers staying home out of fear of catching the virus.

 

Read the full article from The Financial Times +

ACTIVE THEMATIC IDEAS

Select a theme to see when and why we added it. Also included is a link to all recent Market Insight reports we’ve written about that theme, allowing you to track its progress.

SHORT

Airlines

LONG

CRISPR

LONG

Silver Miners

LONG

U.S. Banks

LONG

China Healthcare

LONG

Electric Utilities

LONG

Robotics & Automation

LONG

Solar

LONG

Vietnam Equities

MACROECONOMIC INDICATORS

1.

Week Ahead

 

It will be a busy week in the US with all eyes on January’s job report, ISM PMI surveys, foreign trade balance, construction spending and factory orders. Elsewhere, China’s markets are scheduled to open on Monday after an extended Lunar New Year closure following the coronavirus outbreak, while central banks in Australia, India, Brazil and Russia will be deciding on interest rates. The economic calendar also includes Eurozone retail trade, Germany factory orders, China trade balance and Caixin PMIs, Japan household spending, Australia foreign trade and retail sales; and Hong Kong GDP.

 

Click here to access the data +

2.

Chinese Yuan Trades Above 7

 

The offhsore yuan traded above 7 per USD on Monday as concerns about the coronavirus continue to drag investors’ mood in spite of PBoC announcing a 10bps cut in its reverse repos and a CNY 1.2 trillion injection into money markets through reverse bond repurchase agreements. 7 per USD is a key psychological level and seems to be an inflection point for the currency. The yuan strengthen in early December as trade tensions between the US and China eased.

 

Click here to access the data +

3.

UK Manufacturing PMI Revised Higher

 

The IHS Markit/CIPS UK Manufacturing PMI was revised higher to 50.0 in January 2020 from a preliminary estimate of 49.8 and compared to the previous month’s figure of 47.5. It was the strongest reading since last April, pointing to the stabilisation in the sector following eight consecutive months of contraction. Meanwhile, inventories of purchases declined at the fastest pace since May 2013. On the price front, input cost inflation was the highest since last August, and output charges were up for the 45th straight month. 

Click here to access the data +

4.

South Korea Trade Surplus Narrows to 7-Year Low

 

South Korea’s trade surplus narrowed to USD 0.62 billion in January 2020 from USD 1.04 billion in the same month a year earlier, preliminary data showed. Exports tumbled 6.1 percent after declining 5.2 percent in the previous month, largely due to the US-China conflict. Meanwhile, imports dropped at a sharper pace of 5.3 percent compared to a 0.7 percent decline in the previous month.

 

Click here to access the data +

5.

Myanmar Manufacturing Growth Accelerates

 

The IHS Markit Myanmar Manufacturing PMI rose to 52.7 in January 2020 from a three-month low of 52.0 in a month earlier. Output expanded the most in five months and new orders increased for the fifteenth month running, with the rate of growth accelerated from December’s three-month low. In addition, Also, purchasing activity rate at a faster rate, while employment rose for the 14th month running, and at a rate that almost matched the survey record posted in May 2019. Firms also continued to clear out their inventories of finished goods which declined at the strongest rate in seven months.

 

Click here to access the data +

6.

Fitch Upgrades Lithuania’s Rating to ‘A’

 

Fitch Ratings raised Lithuania’s sovereign credit rating to ‘A’ from ‘A-’ and assigned a stable outlook, citing as key drivers behind the upgrade the economy’s resilience to the slowdown in its main trading partners, lowering debt, and Fitch’s increasing confidence in Lithuania’s policy framework.

 

Click here to access the data +

MARKET INSIGHT UPDATES: SUMMARIES

Markets

China Markets

China counts economic cost of virus as row deepens over travel ban

 

Jittery investors erased almost $400 billion from Chinese stocks, with the Shanghai Composite index down almost 8%, its worst daily drop in four years. The yuan had its worst day since August and Shanghai-traded commodities from oil to copper hit their maximum down limits.

The wipeout came even as the central bank made its biggest cash input into financial markets since 2004 – with an injection of 1.2 trillion yuan ($173.8 billion) of liquidity into the markets via reverse repo operations – and despite apparent regulatory moves to curb selling.

Beijing also said it would help firms that produce vital goods resume work as soon as possible, state broadcaster CCTV reported.

 

Read the full article from Reuters +

Economics & Trade

China Economy

At Least Two-Thirds of China Economy to Stay Shut Next Week

 

More than a dozen Chinese provinces announced an extension of the current Lunar New Year holiday by more than a week as the nation attempts to halt the spread of the novel coronavirus that has killed hundreds of people and sickened thousands.

 

Fourteen provinces and cities have said businesses need not start operations until at least the second week of February. They accounted for almost 69% of China’s gross domestic product in 2019, according to Bloomberg calculations.

 

All the key eastern manufacturing provinces have extended the holiday. They include Guangdong, home to the tech city of Shenzhen across the border from Hong Kong; Shanghai, home to China’s largest port and a newly-built Tesla Inc. plant; Jiangsu, where Nike shoes are manufactured; Henan in central China, which has a large Foxconn plant making iPhones.

 

The 14 provinces included in the extended holiday were the source of 78% of China’s exports in December last year. Those same provinces account for 90% of copper smelting, at least 60% of steel production, 65% of crude oil refining and 40% of coal output.

 

Read the full article from MSN +

Labor, Education & Demographics

Work & Productivity Apps

Coronavirus Forces World’s Largest Work-From-Home Experiment

 

Thanks to the coronavirus outbreak, working from home is no longer a privilege, it’s a necessity. While factories, shops, hotels and restaurants are warning about plunging foot traffic that is transforming city centers into ghost towns, behind the closed doors of apartments and suburban homes, thousands of businesses are trying to figure out how to stay operational in a virtual world.

 

The cohorts working from home are about to grow into armies. At the moment, most people in China are still on vacation for the Lunar New Year. But as Chinese companies begin to restart operations, it’s likely to usher in the world’s largest work-from-home experiment.

 

That means a lot more people trying to organize client meetings and group discussions via videochat apps, or discussing plans on productivity software platforms like WeChat Work or Bytedance’s Slack-like Lark.

 

Read the full article from Bloomberg +

Services

Gaming

China’s coronavirus crisis empties Macau’s mega casinos

 

Chinese visitors normally account for about four-fifths of takings at Macau’s casinos, but the coronavirus has prompted local authorities to ban most arrivals from the mainland. Official data show visitors from mainland China over the important lunar new year period at the end of January were down more than 90 per cent on the year before.

 

US-listed Wynn earns almost three-quarters of its $6.7bn yearly revenue from its Macau casinos, while two-thirds of Las Vegas Sands’ annual revenues of $13.8bn comes from the city. Analysts at Fitch Ratings think the coronavirus will knock $2bn from these companies’ combined earnings before interest, tax, depreciation and amortisation in 2020.

 

Shares of Hong Kong-listed MGM China, Sands China, Wynn Macau and Galaxy Entertainment have all tumbled 15 to 25 per cent over the past two weeks as the coronavirus epidemic worsened.

 

Read the full article from The Financial Times +

Commodities

Oil

China Oil Demand Has Plunged 20% Because of the Virus Lockdown

 

Chinese oil demand has dropped by about three million barrels a day, or 20% of total consumption, as the coronavirus squeezes the economy, according to people with inside knowledge of the country’s energy industry. The collapse in Chinese oil consumption is starting to reverberate across the global energy market, with sales of some crudes slowing to a crawl and benchmark prices in free-fall.

 

China is the world’s largest oil importer, after surpassing the U.S. in 2016, so any change in consumption has an outsize impact on the global energy market. The country consumes about 14 million barrels a day — equivalent to the combined needs of France, Germany, Italy, Spain, the U.K., Japan and South Korea.

 

The decline was measured against normal levels for this time of year. It’s a measure of the current loss in demand, rather than the average loss since the crisis started, which would be smaller. It is probably the largest demand shock the oil market has suffered since the global financial crisis of 2008 to 2009, and the most sudden since the Sept. 11 attacks.

 

Read the full article from Bloomberg +

There is much more to this report! McAlinden Research Partners offers Hedge Connection members weekly access to the Daily Intelligence Briefing research for free – click here to view. (You must be logged in first). Not a member? Join today. McAlinden Research Partners is offering a complimentary one-month subscription to receive the Daily Intelligence Briefing – to Hedge Connection clients/friends. Activate yours by contacting Rob@mcalindenresearch.com and mentioning “Sent by Hedge Connection”

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