Companies with China ties start to feel virus impact

The dangerous virus spreading through China threatens a wide range of industries with ties to the world’s second-largest economy.

Chinese authorities have cut off access to Wuhan, where the virus originated, and 16 other cities to prevent further spread of the virus, affecting more than 50 million people. The financial and economic hub of Hong Kong has cut all rail links to the mainland.

Many of the world’s largest companies rely on Chinese consumers for revenue and factories for supplies. For example, Apple CEO Tim Cook said the virus outbreak has already caused some of Apple’s suppliers in China to delay reopening their factories until Feb. 10 and some stores selling products already have temporarily closed or reduced their operating hours.

“The situation is emerging and we’re still gathering lots of data points and monitoring it very closely,” Cook said.

The virus could shave as much as 1.2 percentage points off China’s economic growth, according to “a back of the envelope calculation” by S&P Global Ratings last week. The International Monetary Fund earlier this month issued a forecast for 6% growth for China in 2020.

Airlines proved to be the most visible barometer of fear as the virus spread. America Airlines has cut back some flights to Shanghai and Beijing because of lower demand. It’s shares, along with Delta Air Lines and United Airlines Holdings, lost ground as reports of new cases surfaced. The industry had been seeing a strong demand for travel, which pushed up prices and left fewer empty seats.

Resorts, including Wynn and Las Vegas Sands slumped as the virus forced travelers to cancel trips to the gambling haven of Macao. Both companies get the majority of their revenue from China.

Technology companies, especially chipmakers, are particularly sensitive to China’s economic health. The sector is still poised to benefit from the easing of trade tensions between the U.S. and China, but the unknown economic damage from the virus in China created more uncertainty for the sector.

Some retailers will likely see their revenue reduced. Starbucks has shut down about half of its stores in China and decided to forgo raising its profit forecast. Nike and Tapestry, which owns luxury brands like Coach and Kate Spade, both get nearly 15% of their revenue from mainland China. and stand to feel the pain of a consumer pullback.

Still, market experts are reminding investors to take a long-term view.

“Revenue and earnings will be impacted, but right now it’s an impact that is very short term in nature’,” said Kristina Hooper, chief global market strategist at Invesco.

The virus outbreak at the moment is overshadowing the preliminary trade deal the U.S. and China signed in mid-January that raised hopes for businesses that relations between the two countries would improve. Businesses were expected to increase spending after holding back for much of 2019 because of the uncertainty over trade relations.

China will likely take measures to stimulate its economy to make up for any damage from the virus and businesses could see a strong bounce once the situation stabilizes, Hooper said. In the long term, U.S.-China trade relations are going to have a bigger impact on companies and the global economy.

“That phase 1 deal doesn’t go away just because we have a virus,” Hooper said.

Picture courtesy: AP