Why the markets could be too complacent about the coronavirus
The news from Apple that the coronavirus will hit sales of its iPhone should not have come as a surprise but has nonetheless provided a jolt to investors who had seemed quite relaxed about the outbreak.
There may now be increased attention on the impact on other firms. The management teams of companies with Chinese exposure, either through their manufacturing function or customer base, will face increased scrutiny over the issue.
Specifically it could be raised when consumer goods firm Reckitt Benckiser (RB.) and advertising giant WPP (WPP) report their full year numbers on 27 February. Reckitt has a significant sales footprint in China and WPP is often seen as a proxy for the global economy.
Apple said it is unlikely to meet quarterly revenue guidance of up to $67bn as it admitted its worldwide iPhone supply will be ‘temporarily constrained’, with demand for products in China also down due to store closures because of the virus.
It comes as an increasing number of market commentators have cautioned that investors are getting too complacent over the disruption coronavirus could cause to global supply chains.
Saxo Bank’s head of equity strategy Peter Garnry said the ‘alarm bells are ringing further and louder every day… that the market is becoming insane’ having continued to rise despite ‘worrying’ comments from experts that coronavirus could infect 40% to 70% of the world’s population in a worst-case scenario.
Instead of looking at company shares at the moment, Garnry added that he ‘cannot emphasis enough’ to look at commodities such as crude oil, iron ore and copper for real insight into the demand picture in China.
Before Apple’s warning, the FTSE 100 had been in recovery mode and the likes of France’s CAC 40 and Germany’s DAX were hitting record highs, along with the Dow Jones, Nasdaq and S&P 500 in the US.
The UK small cap hit by Apple’s news
The Apple warning also had a direct read-across to AIM-quoted semiconductor manufacturer IQE (IQE:AIM), which counts Apple as a big customer.
Its shares plunged over 8% on 18 February to 56p as investors poured over the potential knock-on impact.
Analysts at Canaccord Genuity forecast that, depending on the duration and steepness of the hit to Apple, the potential earnings impact for IQE could be ‘low to mid-single digit percentage revenue and around 5% to 20% adjusted EBIT downgrades’.