COVID-19 – No-one knows

Apple does not know how badly it will miss FQ2 20.

• The first signs of the impact of the COVID-19 outbreak on the world economy have arrived, but critically no-one has any real idea what the real impact is going to be or how much worse it could get.
• Apple effectively withdrew its guidance for FQ2 20 in announcing that it would not meet the FQ2 20 guidance of revenues of $63bn – $67bn that it gave on January 28^th.
• Crucially, it did not say by how much it would miss in a tacit admission that it does not know how bad the satiation is or how long it is going to last.
• Apple has been hit by both weak demand in China as well as its ability to meet demand globally as all of its iPhone are made in China.
• Any company that makes a product either in China or with parts that are supplied by Chinese companies is going to be impacted and seeing that China is the factory of the world, this is going to be almost everyone.
• In the SARS outbreak in 2003, China was a much smaller part of the world economy than it is today meaning that comparisons to SARS are likely to understate the impact.
• The ones that are likely to be least affected will be the companies with no physical product like SAP, Oracle, Google and Facebook or those that have no meaningful sales in China like Amazon.
• However, all of these companies keep their data and do their compute on circuit boards and chassis that are built in China and so eventually they too will be hit.
• The evolution of the outbreak is bad but not catastrophic.
• Assuming that the official figures are correct, the infectious pattern is not following the exponential spread that would accompany a global pandemic but is holding steady at around 2,000 new infections per day and 100 fatalities primarily in one location: Hubei province.
• The figures which are outside of China’s control are supportive of the official figures from China indicating that the containment efforts are broadly effective.
• However, it is not the virus itself that will cause the economic hit but the response to it and the indications are that the Chinese economy is coming back online far slower than expected.
• The fact that new infections are holding steady and the death rate is not falling implies that the outbreak could last for quite some time.
• This will trigger extreme caution on the part of the Chinese government meaning that the normalisation of the economy is going to continue to be very slow.
• Hence, I expect to see widespread warnings across all sectors for Q1 2020 with some overspill into Q2 2020.
• I do not think that this is anyway priced into the equity market which has already been looking expensive following its excellent run.
• Hence, I have liquidated my position in Samsung as well as many other equity positions and I will consider buying back in H2 2020.