Just when investors heaved a sigh of relief from easing of trade war between US and China, outbreak of the deadly coronavirus has spooked investors yet again. The virus which originated in the city of Wuhan in China has till now infected over 40,000 people and killed more than 900 people.
China, the world’s second largest economy, has been forced to shut businesses across sectors to contain the spread of virus. This could have a far reaching effect on the global trade as China makes up about 16% of global GDP.
In India, while the health impact of the virus is confined to just three reported cases till now, the economic impact could be greater. India is a major importer of various products from China such as electronics, machines, chemicals, plastics, etc. Businesses dependent on China for supplies of various components and finished products are bound to be hit.
Graph: India’s imports from China in the last five years (in Rs Billion)
The auto industry in India, already reeling with a slowdown, could see further disruption in their production if critical components from China do not arrive in time. According to the industry, they may struggle to meet the March 31 deadline to roll-out BS-VI compliant vehicles.
Venkatram Mamillapalle, MD, Renault India, while speaking to media said, “This is worse than the impact of the tsunami in Japan in 2011. This time around, factories across the world can potentially come to a standstill because of supply drying out on account of the Coronavirus”.
China is a key supplier of components for electronics such as TV, refrigerator, air-conditioners, mobile phones, etc. to India. The supply chain for these products will feel the impact as inventories dry-up.
India imports bulk drugs or active pharmaceutical ingredients (APIs) from Hubei province, whose capital is Wuhan, to manufacture antibiotics. The Department of Pharmaceuticals is mulling restrictions on the exports of some crucial antibiotics to prevent shortage. “We do store two months stock of APIs and intermediates as part of inventory holding norms. If the plants do not start by end February, then it will become a delicate situation not only for us but for the entire pharma industry”, Mr Kedar Upadhye, Global CFO, Cipla, said while speaking to media.
Indian airlines may be staring at revenue loss as they have cancelled flights to China in the wake of the epidemic.
Prolonged disruption in production would lead to scarcity of goods and result in higher prices of products. Finding alternative supplier may not be easy and could prove to be expensive.
India could also face disruption on the export front as the country supplies products such as spices, diamonds, fish, tea, coffee, etc. The demand from China will be limited as people are likely to stay at home.
RBI Governor Mr Shaktikanta Das recently raised concerns over the spread of the virus and suggested that a contingency plan should be prepared to deal with the impact of the virus on the economy.
The Monetary Policy Committee (MPC) added that the virus may impact tourist arrivals in India and global trade. MPC observed that Equity markets rallied across Advanced Economies and Emerging Market Economies, turning bearish towards end-January with the outbreak of the coronavirus as markets braced up for the likely adverse impact on growth prospects, particularly in China. However, equity markets in most economies recovered some of the losses in early February.
What should investors do?
The extent of impact of the virus on the economy and investments will depend on how damaging the outbreak will be going forward and how the Chinese government manages the situation. If the virus continues to spread rapidly then the impact could be greater.
Corporates in India and around the world will be following a `wait and watch’ approach and closely monitoring the developments as it may affect their earnings. Indian equity market along with other Asian and global markets may face pressure as fear of the virus catches on. However, any impact from the epidemic may prove to be temporary. Just like the world economy recovered in the past from epidemics like SARS, Swine flu, Ebola, etc. it will recover from this as well.
As an investor, do not let short term hurdles derail your long term investment objectives. Diversify your investment across asset classes based on your personalised asset allocation plan to mitigate risks involved. Stick to your investment until your set objective is achieved, but make sure that you conduct a periodic review of your investment portfolio to ensure that it is on the right path to help you realise your goals.
This article first appeared on PersonalFN here