Must-read research and analysis to start your investing day
Skepticism regarding Chinese economic data has extended to reports surrounding the spread of the coronavirus. Strategists at every major firm are attempting to forecast the potential corporate damage the epidemic will inflict.
Morgan Stanley has developed a novel approach based on pollution statistics,
“The start of the new year normally sees higher pollution across China due to higher coal/fuel consumption for heating and resumption of industrial production after Chinese New Year. Guangzhou, Shanghai and Chengdu see a clear pattern – air pollution is only 20-50% of the historical average. This could imply that human activities such as traffic and industrial production within/close to those cities are running 50-80% below their potential capacity. However, Beijing pollution is similar to the historical average.”
Strategist Min Dai called these results “encouraging,” although I’m not sure how. As a firm, Morgan Stanley is sticking with it’s view that the virus is a delay, not derailment, of a global economic resurgence.
“@SBarlow_ROB MS: "Guangzhou, Shanghai and Chengdu ... air pollution is only 20-50% of the historical average” – (research excerpt) Twitter
“Sixty-six new infections of coronavirus confirmed on ship off Japan: statement’ – Reuters
Goldman Sachs U.S. equity strategist David Kostin detailed the market’s reaction to Chinese-facing global companies so far,
“Since January 13, a basket of US firms with high China sales has lagged the S&P 500 by 5 pp (-3% vs. +2%). Constituents include YUMC (100% of sales), WYNN (75%), and QRVO (74%). S&P 500 firms citing the coronavirus as a factor contributing to reduced 1Q EPS guidance include ALGN, AVY, NKE, PH, and ITW. Many consumer-facing US firms halted operations in select Chinese locations. CCL and RCL suspended cruise operations in China. SBUX closed more than 50% of its stores in China. MCD closed hundreds of restaurants in the Hubei province. AAL, UAL, and DAL announced suspension of flights to and from mainland China through March. DIS shuttered parks in Shanghai and Hong Kong.”
“@SBarlow_ROB Kostin: "Since January 13, a basket of US firms with high China sales has lagged the S&P 500 by 5 pp (-3% vs. +2%)"” – (research excerpt) Twitter
See also: “@SBarlow_ROB BMO: "it seems mighty early to be sending an all-clear signal, especially since economists are still scrambling to work out the first-round effects "” – (research excerpt) Twitter
The Financial Times’ frequently brilliant Alphaville site (free to read with registration) detailed a new type of risk in the ETF sector,
“A new SEC rule brought in at the end of last year has made it much easier for official dealers to negotiate the types and proportions of securities they deliver to exchange traded fund (ETF) managers when creating and redeeming ETF units… This means, in theory, the baskets of stocks or bonds delivered by a dealer to ETF managers can have little in common with the proportions of stocks and bonds set out in the indices they’re linked to… regulatory frictions often incentivised ETF managers to achieve flexibility in different ways, notably by replacing stocks and bonds entirely with alternative collateral such as cash. But, as the SEC also noted, this only replaced one risk with an equal if not greater risk.’
The article features a study by the Bank of Canada but does not mention how extensive this practice is in domestic markets but investors will have to re-double efforts to make sure their ETFs are tracking the index they are designed for.
“What’s really in your ETF basket?” – Kaminska, FT Alphaville
Diversion: “Men Are Experiencing Days of Weird Vision After Taking Erectile Disfunction Drugs” – Gizmodo
Tweet of the Day:
I still don't believe investment algos have a clue about disease. Especially when the input data can be so error ridden.— Polemic Paine (@PolemicTMM) February 10, 2020
We think it is human risk assessment driving market swings but most of it isn't.