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.
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.
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.
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.
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.
Managing Director, Research
McAlinden Research Partners