The material from this article is disucssed in the latest epsode of the Fidelity Answers podcast. The article continues below.
Among those expecting the virus to lower earnings for the companies they cover, 85 per cent of our China analysts expect that hit to be contained to the first half of the year, compared to just 42 per cent of analysts covering other regions who expect the impact to extend into the second half. One industrials analyst reports: “In general my companies are expecting China to recover by the second half of the year, and production there is [already] back to around 70 per cent of capacity,” while a healthcare analyst notes: “It’s a very fluid situation but in China things are back to a 95 per cent manufacturing capacity.”
And despite 87 per cent of China analysts expecting the virus to damage profitability, the highest of any region, they expect the magnitude of that hit to be milder than other regions.
Since China was the first country afflicted by the virus it seems logical it will recover the fastest. But the time taken to resume business activity in countries struggling to cope with the outbreak will also depend in large part on the containment measures taken by individual governments. The Chinese authorities’ decision to impose strict travel restrictions in affected areas relatively early in the outbreak seems to have ensured the country will face a broad-based shock to the system, but will recover relatively quickly with less of an impact to earnings overall.
China’s recovery may not be matched by other regions
Compare that to efforts in the West, which have centred on slowing the spread but avoiding economic shutdowns for as long as possible. The difference between the approaches is difficult to predict at this stage, but one consumer staples analysts covering North American firms cautions: “Be careful extrapolating a full shutdown in China to Western consumer behaviour,” while a US consumer discretionary analyst notes: “My base case is a very negative impact from the virus in the first half of the year which potentially bleeds into the third quarter due to changes in consumer behaviour and social avoidance.”
Many analysts covering companies in Asia, Europe and North America report that although production is now resuming in China, the knock-on effects to supply chains will be felt across the globe for some time to come. As one consumer discretionary analyst covering the Asia Pacific region puts it: “Supply chain concerns are the biggest focus right now, the difficulty of getting product not just out of China but also the slowdown in the supply chain more broadly. Demand implications and potential for this to get worse are less well managed and understood.”
However, the situation appears to be rapidly improving, highlighted by a European industrials analysts who notes: “As of 9th March, 92 per cent of the 140 Chinese factories important to my companies are open. Not one of those factories was open in February. Of the open factories, 27 per cent were running at high capacity and another 42 per cent were running at OK-ish capacity. One week prior to that the split was 2 and 11 per cent respectively, so the direction of travel is very positive at the moment.”
Technology sector also looks well placed to handle virus shock
Another area of the market that looks better positioned than others is the technology sector. Our analysts also expect the hit to earnings as a result of the virus outbreak to be shallower than other sectors. An IT analyst covering companies in emerging economies excluding Asia reports that “China seems to be back, so companies are actually quite positive.”
The technology sector has more recurring revenues that will mitigate liquidity concerns, while our analysts note that sub-sectors such as video games and remote working will see a boost as countries attempt to limit travel and social gathering. The manufacturing recovery in China is also helping - a North American technology analyst adds: “Capacity in China is back to 80 per cent from 40-50 per cent in February. People are going back to work. Most companies I have listened to on earnings calls have taken guidance down as a precaution but are expecting sales to be delayed rather than lost.” Technology companies are also amongst the most prepared for the outbreak getting worse - there is already a culture of working remotely and of all the sectors it has the technology to do so.
The Fidelity Quarterly Sentiment Tracker for March 2020 features 185 responses from 152 analysts (analysts who cover more than one region or sector take the survey once for each sector/region combination). The survey was conducted between 7 March and 12 March.
What question should we tackle next?
Email your suggestion email@example.com
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.
ED20 - 73