COVID19 Impact Analysis


I recently came across the following on social media…

“One of the worst days so far for Coronavirus was the 10th of February.  On that day, 108 persons in China died of Coronavirus.

But every single day, around the rest of the world, an average of:
26,283 people die of Cancer
46,575 people die of Heart Disease
4,383 people die of Diabetes
On that day, suicide took 28 times more lives, while mosquitoes kill 2,740 humans every day.
Humans kill 1,300 fellow humans every day.”
Fact Check:

Given that this is from social media, we should take the numbers with a grain of salt, but it does show the extent to which the COVID19 (COronaVIrus Disease 2019) has taken over the media and people’s psyche despite the relatively low death count, comparatively speaking. 

Undoubtedly, the fear of a virus that spreads as fast as the flu but is 20 times more deadly, is a legitimate reason for the sane to worry.  More importantly, failed attempts to contain it are resulting in borderline panic.  Face masks are increasingly difficult to come by and there are photos of empty Costco shelves popping up every day. 

The reasons for fearful individuals are clear, but how this translates to double-digit stock market drops is another matter.  Although consumption in China is being affected by the quarantines, surely the spending in drug research, sanitation products, healthcare and the ‘hoarding’ behaviour for consumer staples around the world is offsetting some of this economic damage. Moreover, how does the Coronavirus’ impact translate to companies like Rogers Communications, which saw its share price drop 10% last week despite no foreseeable negative impact to its earnings. 

As you can see, the “why” behind the impact to the stock markets is not quite as clear cut.  We contend that the stock markets volatile response to the outbreak is caused by three factors: 

  1. The state of the economy
  2. The impact on supply chains
  3. The valuations on the stock market

“It’s the Economy stupid!”  - James Carville

Regular readers of our newsletter will recognize the following, shared in early January:

“The whole economy is growing much slower than anticipated.  Global growth for 2019 was projected to be 3.7% in October 2018 and is now expected to come in closer to 3% according to the International Monetary Fund (IMF) and closer to 2.6% according to the World Bank.  This reduction would represent an almost 30% drop in anticipated world growth for the year.”

As can be seen in the chart above, all hopes were pinned on an economic recovery in 2020, particularly in China. According to the IMF[i], China now represents almost 16% of the world’s economy, more than Germany, the United Kingdom, France, Canada, Russia, and Mexico combined!  More importantly, it generates between 25 and 30% of the world’s growth.[ii]

The latest economic figures were pointing to a weak recovery that could have transformed into further slowing growth at the slightest hiccup.  With 780,000,000 million people, more than double the population of Canada and the US combined, living under some sort of travel restriction[iii] or quarantine, it might just be the straw the breaks the camel’s back and prevents the economic recovery that the stock market bulls were betting on.

“Just in Time”

Over the past fifty years, as globalization marched on and the interconnected web of supply chains became more complex, a new manufacturing method was born.  “Just in time” manufacturing, or what is now known as “lean manufacturing”, became the norm.  Instead of stocking up on all of the raw products manufacturers need to produce their end goods, “just in time” manufacturing tightly coordinates the delivery of required supplies just as production is about to start, and then finished products are shipped almost as soon as they are complete.  The economies of not paying to warehouse all those excess materials are substantial, but also result in very delicate supply chains.  In our modern day economy wherein the assembly of a vehicle may involve parts from a dozen or so countries, one missing part can bring the manufacturing line to a complete stop and cause a domino effect.

Procter & Gamble, a large consumer goods company, recently announced that 17,600 of its individual product lines would be impacted by the Coronavirus supply chain issues[iv]

Other notable companies that have reported similar supply chain issues include Apple, Adidas, Starbucks and many others.

As quarantines are expanded and more supply lines are affected, the full impact to the economy is unknown at this time and is certainly adding to the concerns of global investors.

“Price is what you pay. Value is what you get.”  - Warren Buffett

As we have contested in several of our more recent newsletters, (Jan 2020, Sept 2019) stock market valuations were a little ‘rich’ for our liking going into 2020.  Dubbed the ‘Teflon Market’, stock markets in the United States seemed to shrug off bad news and kept marching higher, regardless of economic fundamentals. 

This trend left the market particularly vulnerable to sudden shifts in valuations, a lesson that investors were recently reminded of as shown in the recent sell-off of the last two weeks.  The world is a scary place filled with uncertainty and there is no such thing as a sure bet to make money in the short-term.

Although this recent volatility has presented some worthwhile opportunities, we continue to believe that the market as a whole is not yet pricing in the potential fallout from the concerns we identified above. 

How we are reacting to all this…

In a word – patient. 

In two words - situationally greedy.

We have deployed 5% of the cash position in the Private Pool to buy quality names at what we deem to be attractive prices, particularly in global markets.  We have not yet jumped into the deep end with any major allocation changes as we believe there are more bargains to be had as the full brunt of a slowing economy ripples through the credit markets and is underscored by economic indicators.

Undoubtedly, this is a stressful time for the Do-It-Yourself investor.  For students of the market with clearly defined strategies to profit from these types of market movements, it is an exciting time! 

“Be Fearful When Others Are Greedy and Greed"  - Warren Buffett









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