Covid-19 is turning into a global pandemic in which few, if any, countries will be spared. With swathes of China’s economy having ground to a halt, disrupting supply chains throughout the world, and the rapid escalation of the epidemic in parts of Europe and the Middle East, fears are growing that the economic impact could be as bad as that of the 2008 global financial crisis.

This has led to panicked selling on global markets, which have experienced their worst losses since 2008. Over the past two weeks, the JSE all share index has crashed 9.7% — wiping billions off the pension savings of millions of South Africans. For this year, the JSE is down a mammoth 13.3%. While the US Federal Reserve cut interest rates by 50 basis points (bp) last week as an emergency measure, it failed to stem the rout on global markets — which, notably, is the opposite of what happened in 2008.

The timing could not be worse for SA, which lacks the policy space to mount a fiscal response. It announced its first case of Covid-19 last week, a 38-year-old KwaZulu-Natal man who’d just returned from a skiing holiday in Italy.

By the time of going to print, six other cases — all of them from the same travel group — had been confirmed.

Countries most at risk, warns the International Monetary Fund (IMF), include those with weak health systems and inadequate policy space, and commodity exporters exposed to terms-of-trade shocks. Though SA has pockets of excellence in its health-care system, it arguably has all these attributes.

It’s not as if SA got off to a great 2020 either. In February, the manufacturing purchasing managers index (PMI, which gauges manufacturing activity) fell to its lowest level since the 2008 financial crisis — and this before the growth-sapping effects of the global outbreak had been fully felt. Add to that announcement of a 1.4% shrinking of the economy in the last quarter of 2019 (which put SA back into a recession), and it’s clear we were in a bind even before the outbreak.

It all suggests that the SA economy, which has been slowing for roughly the past eight years, could easily contract outright in 2020.

With SA sliding inexorably towards a debt trap, the biggest risk to the fiscal framework was that the National Treasury’s latest revenue and growth forecasts might fail to materialise. The global outbreak has now ensured that they will be missed by a mile — which means SA’s fiscal distress could rupture into a full-blown crisis.

New York University economics professor Nouriel Roubini — nicknamed "Dr Doom" for predicting the global financial crisis — thinks markets are underestimating just how bad things could get.

Roubini warns that global equities could tank by 30%-40% this year and that, if the outbreak hits a place like New York City, "we are totally fucked".

Other analysts have used more temperate language, but their warnings are becoming more stringent.

"With each passing day and each additional data point, the conviction over global growth forecasts weakens, with the only certainty being that risks are poised to the downside," says Rand Merchant Bank analyst Nema Ramkhelawan-Bhana.

Anchor Capital CEO Peter Armitage, in a research note this week, described the outbreak as a "black swan event", in which nobody can really predict what happens next. "Markets are down by between 15% and 25% from their highs — a huge drop ... Locally, domestic shares had effectively already crashed, and this second wave of declines leaves many counters at valuations last seen during the 2008 crash," he said.

While share prices could get worse and market drops can feel uncomfortable, Armitage points out that "real money is made by investing at the bottom of the market in quality companies at good prices".

Much depends on how the global economy responds.

Memories of 2008

The Organisation for Economic Co-operation & Development (OECD) interim economic outlook report warns that Covid-19 presents the greatest danger to the global economy since the financial crisis.

Its best-case scenario is that 0.5 of a percentage point is shaved off 2020 global growth, taking it down to 2.4% as supply chains and commodities are hit, tourism drops and confidence falters. This would be the weakest growth rate since 2009. Its worst-case scenario is that global growth plummets to 1.5% this year.

Capital Economics is even more bearish. It argues that structural changes in the global economy, including the rise of globalisation and dominance of the services sector, make it more vulnerable to flu pandemics than in the past. Rather than a small gain, it fears the world’s economy could shrink by 0.5% this year — equalling the contraction seen during the global financial crisis.

Poland. Picture: Bloomberg/Bartek Sadowski
Poland. Picture: Bloomberg/Bartek Sadowski

Kevin Lings, Stanlib’s chief economist, says two main questions arise in assessing the economic impact of the virus. First, how quickly will China be able to resume economic activity now that its rate of new infections appears to have stabilised? And, second, is the global spread of the virus getting out of control?

Certainly, the impact on China’s output has been far worse than initially feared. The country’s PMI has experienced its sharpest decline ever — indicative of a severe recession to come.

This is due largely to the draconian quarantine measures and travel bans imposed by the Chinese government to contain the virus. But the knock-on effect on China’s demand for commodities has also led to the bulk shipping of goods into China collapsing.

For SA, this is brutal, as China is our top export destination. Last year, it bought nearly 11% of SA exports by value, ahead of Germany, which took 8.3%.

The good news is that there are signs the Chinese government’s aggressive containment measures have been effective. According to Citibank, China’s work resumption rate jumped from 65.4% to 87.1% among industrial enterprises in the final week of February; 50% of economic activity was back on track, compared with 44% a week earlier; and coal consumption by power plants had climbed to 65.4% of last year’s level, from 58.3% a week earlier.

New York subway station. Picture: Bloomberg/Victor J. Blue
New York subway station. Picture: Bloomberg/Victor J. Blue

Martyn Davies, MD of emerging markets and Africa at Deloitte, argues that what China does next will determine the economic trajectory of Sub-Saharan Africa and other commodity-producing nations.

Ten years ago, the immense fiscal stimulus China unleashed in response to the global financial crisis lifted it and other commodity-exporting countries into a V-shaped recovery. Though conditions are different now, and the Chinese authorities have so far unlocked just RMB1-trillion ($143bn) in various relief measures — four times less than in 2008/2009 — President Xi Jinping has promised a "more active" fiscal policy and further stimulus measures are likely.

"We will have short-term pain now," says Davies, "but the way China stimulates its economy will likely give SA some potentially strong tailwinds in the second half of the year, as it experiences a rapid pick-up in commodity demand."

That sounds positive. But unfortunately SA won’t benefit from this as much as it should, because of electricity supply problems at Eskom and a bottleneck in building new infrastructure.

Davies adds that SA’s Brics policy has worsened its dependence on China over the past decade, at the expense of other emerging-market and traditional trade partners. "If this [virus-related] export and supply-chain shock doesn’t awaken the policymakers to this single-country dependence, nothing else will," he says.

While China gets back to business, the next critical question is whether the virus is out of control globally. How policymakers respond is crucial, given that much of the economic damage done by viral outbreaks happens because of the disruptive measures used to prevent new infections.

According to the IMF, about one-third of the economic losses from the disease will be direct costs from loss of life, workplace closures and quarantines. But the remaining two-thirds will be indirect, due to a fall in consumer confidence and business behaviour, and a tightening in financial markets.

So far Italy has responded with a countrywide shutdown. Japan and South Korea have taken less extreme action, suggesting that their economic disruption is unlikely to be as severe as in China.

Italy, the hardest-hit European country, with more than 9,000 infections at the time of going to print, is facing a 0.3% GDP contraction for the full year, according to S&P Global Ratings, while Germany’s economy is set to stagnate as supply-chain disruptions hamper its industries amid weaker external demand.

"For now, the main drag on growth will be faltering external demand and supply-chain bottlenecks," warns Sylvain Broyer, S&P chief economist for Europe, the Middle East and Africa.

"But domestic demand is starting to weaken across Europe as well, and not just in Italy."

S&P expects the outbreak to knock 50bp off growth in the eurozone this year (taking it down to 0.5%) while it’ll lop 20bp off the UK’s growth, dropping it to 0.8%.

However, Broyer says the outlook would improve if the world’s largest economies (the G7) were to mount a concerted fiscal stimulus to counter Covid-19.

Primed from having suffered through the 2008 financial crisis as well as previous global flu pandemics, including swine flu in 2009/2010 and SARS (severe acute respiratory syndrome) in 2002/2003, the IMF and most major central banks have moved swiftly to try to get ahead of the calamity.

Mounting a response

The IMF is making $50bn available, immediately, to low-income and emerging-market countries that seek support, while the G7 has pledged to use "all appropriate policy tools" to safeguard economies.

Nonetheless, their efforts have fallen short of a co-ordinated global response. "Considering the fatality rate [is rising] to above 3%, and an escalation in the number of reported Covid-19 cases globally to beyond 90,000 [it had risen to over 117,000 at the time of going to print], the probability of more intense central bank action is swiftly rising. Yet, policy space is lacking," says Ramkhelawan-Bhana.

As it is, interest rates are already negative in Japan and the eurozone.

In fact, the Fed is so concerned about Covid-19 that it acted outside its normal schedule for the first time since 2008, when it cut its benchmark rate by 50bp to leave rates barely positive, even though the US economy is performing well.

Fed chair Jerome Powell acknowledged that the cut will "not reduce the rate of infection … or fix a broken supply chain". Rather, it was intended to cushion consumer and business sentiment from the severity of the outbreak while easing financial conditions.

It didn’t work. If anything, the shock of the move, which was followed swiftly by further easing by the central banks of Canada and Australia, dialled up the global panic level.

Economists argue that with global interest rates at rock bottom or even negative, fiscal policy is likely to be more effective at stimulating demand, since it can be targeted at the worst-hit firms while supporting those involved in prevention and treatment, as China and Italy have already done.

Italy has announced a fiscal boost equivalent to 0.2% of GDP. By comparison, the $7.8bn emergency funding being deployed by the US amounts to just 0.04% of its GDP. President Donald Trump has balked at pursuing a major fiscal plan, according to news agency Bloomberg, and is not considering a payroll tax cut or a rollback of tariffs on China.

Click to enlarge.
Click to enlarge.

South Korea, Malaysia, Singapore and Indonesia are all crafting stimulus packages, while Hong Kong has offered every adult permanent resident a HK$10,000 cash handout.

Last week, South Korea added a third tranche to its stimulus package, taking it to 30-trillion won or 1.3% of GDP. This is expected to push Korea’s consolidated budget into a deficit (of 2.1% of GDP) for the first time in more than 20 years.

The problem in SA is that public finances are stretched to the point where there is nothing left to buffer any large shock. The budget deficit is set to hit 6.8% this year on real GDP growth of 0.9% — which would make it the largest deficit since the end of apartheid. Moreover, there is only R5bn in the contingency reserve for each of the next three fiscal years, R3bn having been stripped out in the latest budget.

Mercifully, SA has more space on the monetary policy side. For a start, there is a rising consensus that the Reserve Bank will cut interest rates at its March 19 meeting, and again later this year, due to the deteriorating growth environment and relatively low inflation. And, of course, the more other central banks cut rates, and the lower global bond yields fall, the more supportive the environment becomes for high-risk emerging markets like SA.

But make no mistake, even before the outbreak SA’s public finances were unsustainable and its macroeconomic fundamentals increasingly unsound.

Covid-19 will only hasten SA’s relentless unravelling, but it won’t be the primary cause — for that we have only ourselves to blame.

What it means:

The global Covid-19 outbreak will worsen SA’s fiscal and economic distress, likely causing a severe economic contraction

The virus has its upside: some gainers among businesses

Coronavirus will eat into the earnings of millions of companies, but experts say the opposite will apply to a few outliers, such as those with food delivery built into their businesses.

Many Chinese cities have banned eating in restaurants, leaving the market wide open for food and grocery delivery services.

Financial information website MarketWatch last week said that, in the past 30 days, 21% of US consumers ordered perishable, edible groceries online (up from 18% a year ago). Meanwhile, market research company NPD Data says there was 20% growth in spending on food deliveries in China in January compared with a year ago.

US retailer Bath & Body Works’ hand sanitiser business is another winner.

About 5% of the company’s annual sales come from this product, and it is the top US retailer for the product.

Investment firm MKM Partners has created a “stay at home index” of companies that could be safe havens if consumers become more reluctant to go out and if people work more from home, according to CNN Business.

Netflix is one of the 33 stocks in the index. Its stock is up more than 15% this year, whereas movie theatre chains such as AMC and Cinemark have each dropped more than 15% — as has concert promoter and Live Nation, which owns ticket management firm Ticketmaster.

Other gainers include Amazon, Facebook, video game developer Activision Blizzard, exercise equipment maker Peloton and food delivery service Grubhub.

Businesses like identity management software company Okta and collaborative office tool Slack could also benefit, as could video conferencing company Zoom, whose shares jumped 38% in February.

Not featured in a report — but already getting a boost — is Teladoc. Shares in the company, which allows patients to video chat with doctors, are up 50% so far this year.

Already the lockdown in China is looking to be a boon for online entertainment providers, says online publisher TechCrunch. The short video sector recorded 569-million daily active users in China’s post-holiday period – well above the regular 492-million. And social media, from YouTube to Weibo, is surging across Asia, according to news website Quartz.

Throughout China, employees are working from home and students are livestreaming lectures. From Hong Kong and Thailand to South Korea people are logging on as businesses and schools shut down.

Companies focused on diagnosing, treating and preventing Covid-19 are also on the up.

“There’s no question that the coronavirus outbreak will boost sales for [diagnostic companies] GenMark, Co-Diagnostics and Alpha Pro Tech,” says Keith Speights of The Motley Fool. He says two small biotechs that also stand out are Inovio Pharmaceuticals and Novavax — though he says investors should exercise caution, given a dearth of available information.

The stock of Regeneron Pharmaceuticals, which is developing antibody treatments for the coronavirus, jumped 32% in February.

Protea Capital Management CEO Jean Pierre Verster says it’s difficult to see any outright winners because of the virus. “A few pharmaceutical companies announced they’re working on vaccines — and whoever is successful in creating a vaccine with efficacy will make a lot of money out of that. But w e’re still a long way from that.”

Verster sees a buying opportunity in cruise ships, where he expects a rebound in the long term. Though aircraft stocks have fallen, he believes “the impact on airlines would be larger, given the very high running cost of the airline and extreme sensitivity to occupancy … If the share prices continue to fall it could be an opportunity.”

Adele Shevel

Corona beer: What’s in a name?

No brand has garnered more attention recently than Corona Beer. Last week, a poll by PR agency 5WPR said 38% of Americans won’t drink it because they’re afraid of contracting the coronavirus.

But news website The Atlantic has said this is misleading: only 4% of the Americans who regularly drink Corona say they will stop drinking the beer.

Mark Ritson, writing in respected publication Marketingweek, says brands from Marmite to Peloton have shown negative publicity is beneficial if it doesn’t undermine your core image. For this reason, Corona will be fine.

As he says, the first name to come to mind for thousands of beer drinkers in the coming months will be “Corona”. This is not because of what it stands for; not because of the negative associations it evokes. “Just because that was the first beer that came to mind. The reptile brain wins again. And so — if this column is correct — will Corona.”