Adverse Supply Shock – ‘Supply Disruption’
The ‘Adverse Supply Shock’ affects prices directly, as well as production costs Consequently, policymakers face an adverse reverse bid.
Because of the corona virus and its (informal pandemic) dimensions, China has been most affected, as it has not only originated there, but has the most carriers and victims, as well as factory and company closures. China’s production chains have been abruptly interrupted, directly affecting the tech companies in particular, as they lack stocks that were already taken into account.
In addition, demand from China for all technology products is significantly reduced, and companies – such as Apple – will be affected. China no longer accounts for the 4% (as it used to be some years ago) of the Global Growth (today:16%). This means that any negative developments in this country have serious consequences worldwide. Should the corona virus continues to spread, the world economy is likely to enter a recession.
In order to tackle this adverse supply chock and the possible recession, central banks need to cut interest rates, not only in the US, but in all developed countries as well. A systematic, well-arranged, and in concert appropriate actions will take time to achieve the much needed results in order to avoid recession.
In terms of corporate profitability, estimates at an early stage of 2020 were favorable, anticipating a fruitful year. Analysts are no longer optimistic and a 20% reduction is in the cards, compared to initial 2020 estimates. This translates into overvalued stocks as of today.
The shares have already returned to the levels of October 2019. In this case, the overvalued stocks will be further corrected, consequently a strong negative trend may not be avoided.
Nevertheless, it will all depend on whether the monetary policy of both the US and other economies will be effective (the eurozone is already at zero interest rates) and the markets will be affected accordingly.
In China estimates and charts show business and industrial activity for large enterprises (Manufacturing PMI index) at 35.7%, and for small and medium-sized enterprises at 40.3% (Caixin Manufacturing PMI index). To be noted: Any indicator below 50% is a sign of a slowdown and a possible future downturn.
A wait-and-see attitude is being adopted, as to whether and to what extent monetary measures shall be effective, while limiting the spread of the virus to more victims in more countries becomes a major issue.
Mapping the Coronavirus Outbreak Across the World