Investors Flock to Safe Haven Amidst Coronavirus Concerns, Tech Stocks Crashes

The impact of coronavirus has been witnessed in various countries across the world who have trade relations with China.

As per the recent report of Deloitte, the reason behind the weakening of the Chinese economy is due to the reduced consumer spending and activity along with the slashed industrial production that has resulted in fiscal stimulus. The government is running a fiscal deficit of ~ 3% of gross domestic product.

According to the International Energy Agency (IEA), coronavirus outbreak has resulted in a drop in the demand for the oil in 2020. It is expected that the demand for oil will grow at the slowest pace since the year 2011. It is also anticipated that there would be a sharp drop in the global oil demand in the first quarter.

The executives from China belonging to the energy companies, anticipate a drop in the oil demand by 25% below its normal range in the first quarter. Also, Coronavirus, would have a far bigger influence on the global oil market than the SARS virus because of a much greater dimension of the Chinese economy at the present time. Also, a sharp fall in the oil prices has been noted during the last month.

Other than the energy sector, the impact of coronavirus could also be experienced in the global shipping industry. The rates charged by various shipping firms has reached to record lows because of a severe decline in the volume of freight going in & out of China. A few ports are closed because the ships are stationed in the middle of the sea.

Further, restrictions on movement persist to disturb the consumer economy of China. Shopping centres and offices continue to be vacant.

Now, the question that comes to the mind is how would it impact the global economy? The answer to this question is that in recent times, China has accounted about 1/3^rd of global growth. Any impact on the Chinese economy would have a direct impact on the countries having a trade relation with the country.

Further, the coronavirus eruption resulted in interruption of Chinese factory production as well as distribution, which has also impacted the supply chain of the nearby nations. Because of the disruption in the supply chain, the problem could be experienced in countries like Southeast Asia, Korea, Japan etc. The mines and farms would be impacted in Australia, Indonesia and other nations.

Most countries around the world rely strongly on sales in China. The companies in these countries are experiencing a sharp fall in their share prices. Tourism sector has also been impacted by this outbreak.

Australia’s Economic Relationship with China:

Currently, China is the largest trading partner of Australia both in terms of export and import. On the other hand, Australia is the sixth largest trading partner of China. Australia is China's fifth largest supplier of imports & its tenth largest client for exports. 25% of the country’s manufactured imports come from China. While Australia supplies 13% of thermal coal to China.

Australia also had entered into a China-Australia Free Trade Agreement with China on 17 June 2015, under which the trade negotiations ensured several future gains for Australian business with China. In turn, China has also consented to a clause accepting Australia as a most favoured country.

The key effect of the agreement was that China agreed to offer Australia with its superior services obligations, lessened labour movement obstacles, enhanced temporary entry access, duty-free admission on 96% of the items manufactured in Australia goods exports on full execution of the contract. The deal enabled all of Australia’s manufacturing, energy as well as resources exports’ direct entry to China and that too tax-free.

ASX feels Coronavirus pain:

As China is the largest trading partner of Australia, the impact of coronavirus has impacted various sectors on ASX. Most of the sectors listed on ASX closed in red on 25 February 2020. In February 2020, the S&P/ASX 200 dropped by 2.15%.

By the closure of the market on 25 February 2020, S&P/ASX 200 slipped 1.63% and settled at 6,866.6 points. Most sectors on ASX closed in red and reported a significant drop in their values. Consumer Discretionary, Energy, All Ordinaries Gold, Materials, and Communication Services sectors dropped by more than 2% compared to their last close.

When it comes to the Information technology sector, the sector which gave 35.73% in 2019, closed at 1,432.6, a fall of 0.27% from its previous close. The index from 31 January 2020 to 25 February 2020 dropped 8.34%. The new technology index S&P/ASX All Technology Index dropped 0.84% from its last close at 2,001.8.

Also, in the current earnings season, most of the companies have declared either their half yearly results, full year results or updated on their upcoming results. The companies have declared a strong result, but they expect an impact on their revenue in future because of the coronavirus impact. An example of such a company is WiseTech Global Limited (ASX: WTC).

WiseTech Global Limited (ASX: WTC) is a component of WAAAX stocks and is considered to dominate the Australian Information Technology sector, as well as the new technology sector S&P/ASX All Technology Index. On 19 February 2019, WiseTech Global Limited released its 1H FY2020 result and reported a growth of +31% in its total revenue to $205.9 million. Operating profit improved by +17% to $42 million and net profit by +160% to $59.9 million. The company’s dividend also increased by +13% to 1.7 cents per share. However, the company’s outlook for FY2020 created fear amongst the investors.

WiseTech’s CEO, Richard White stated that because of the eruption of COVID-19 followed by the current halt of activities in China, which is WTC’s critical driver of the international manufacturing supply chain, as well as a circa 16% contributor to the international Gross Domestic Product, there is a negative flow-on impacts to manufacturing, decelerating supply chains & economic trade throughout the globe.

Even though WiseTech has diverse sources of revenue drivers, the company still expects the production slowdown will defer implementation of logistics activities by logistics service providers.

WiseTech has been one of the most preferred companies by the investors. However, since the release of the result, the shares prices have dropped significantly. The shares which traded at $29.44 on 18 February 2020, dropped to $18.83 on 24 February 2020. On 25 February 2020, WTC shares closed at $19.160, with a growth of 1.75% from the previous close. However, on 26 February 2020, WTC was at $17.570, slipping down by 8.299 percent compared to its previous close.