There used to be an old trading rule of thumb that if British Airways financial performance started to suffer then it was sensible to sell the shares of global investment banks like Goldman Sachs, Morgan Stanley and Credit Suisse. The trader thinking was that a drop in profitable business bookings on BA signaled a downturn in international financial activity. Today’s news that BA is suspending flights to and from China did prompt some similar thoughts. Clearly, the Corona Virus is a medical story first as medical authorities struggle to contain the outbreak. The good news is Australian scientists have made some progress in recreating the virus and ultimately finding a vaccine. The bad news is possibly more financial.
Despite the best efforts of Donald Trump, Boris Johnson and other stable geniuses to mislead on trade, the global economy is incredibly connected these days. Just-in-time supply chain management allows companies to efficiently manufacture goods and sell to consumers at ever-cheaper prices. As we digest Apple’s astounding quarterly results from last night, we couldn’t help noting that AirPods alone are on course to exceed $20 billion of sales. This product only launched 4 years ago and is on the cusp of matching the annual global revenues of Starbucks by 2021. Mind-blowing.
Apple is Exhibit A in incredible manufacturing/supply chain management; through 2019 Apple was shipping more than 500,000 iPhones and 150,000 AirPods on a DAILY basis. However, it needs air freight to move high-value parts and finished products around the globe. The BA news today will focus minds. Airfreight moves $6 trillion of goods globally each year which is more than a third of global trade by value. In our previous piece “Charting A Dose Of Flu” we flagged that the real worry for financial authorities is a global halt of the cross border movement of people and goods. One can be hopeful that the medical outcome will be managed but the economic damage could be significant for companies in 2020. Here’s a few headlines which caught the eye:
- Toyota stops production in China until February 9th
- Starbucks has shut more than half its coffee shops in China – around 2000 of them.
- McDonalds has suspended activities in 5 Chinese cities.
- H&M has closed 13 stores in China.
- Siemens, Peugeot and IKEA are also looking at measures to protect their workforces.
Financial markets yesterday recovered from Monday’s swoon but it is difficult to see how the Coronavirus will not inflict financial pain on companies and that is before we start to read headlines about supply chain interruptions for manufacturers all over the world. Bosch has already warned about problems brewing in its own operations which employ 400,000 people globally with 60 factories in China alone. They probably know what they are talking about.
The above information is just that. It is not a call to panic. Markets encounter external shocks all the time. On the contrary, a little deflation of markets is healthy and allows investors to avail of cheaper opportunities. Perhaps, the more significant lesson is for the anti-globalist delusionists occupying political leadership positions. Disruption to global trade or trade agreements can be incredibly painful. So, take that as our 50 pence worth for Boris and the Big Ben clappers. Sadly, the commemorative tea towels for January 31st won’t be sufficient to clear up the Brexit mess.