Coronavirus News Asia

Diversification key to outperforming the market

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The year 2020 will go down in history as the year when the world turned upside down and the global economy almost collapsed. In a matter of weeks, hundreds of millions of people worldwide have lost their jobs because of mandatory quarantines. 

In Africa, South America, North America, Europe and Asia – no country has been able to sustain positive growth rates or, at least, avoid the impact of this financial crisis. Even Sweden, which left much of the economy open, is now heading into its worst recession since World War II. According to Finance Minister Magdalena Andersson, the government is expecting gross domestic product to shrink by around 7% this year.

On Wednesday, the World Trade Organization said its goods trade indicator fell to the lowest level since 2011. The barometer captures the initial phases of the Covid-19 outbreak and shows no sign of the trade slump bottoming out yet. It is consistent with the WTO’s trade forecast issued in April, which projected a decline in world merchandise trade of between 13% and 32% in 2020.

https://www.wto.org/english/res_e/statis_e/wtoi_e.htm

The automotive products index (79.7) was weakest of all because of collapsing car sales in major economies. The sharp decline in export orders (83.3) suggests that weak trade growth will persist in the short run. Weak demand for traded goods is also reflected by drops in indices for container shipping (88.5) and air freight (88.0).

Only the indices for electronic components (94.0) and agricultural raw materials (95.7) show signs of stability, although they remain below trend.

https://www.wto.org/english/res_e/statis_e/wtoi_e.htm
https://www.wto.org/english/res_e/statis_e/wtoi_e.htm

It is worth noting that trade was already weak in the final quarter of 2019, mainly because of trade war between major economies, especially China and the United States. In this context, the fact that tensions between those two countries are growing again suggests that problems will remain even after the pandemic crisis ends. 

Once again, chips stocks have been used as a weapon in the trade war. Recently, President Donald Trump’s administration decided to cut off Huawei from accessing chips made with US software or technology.  

Advanced Micro Devices is one of the American firms exposed to trade-war fallout, with roughly 26% of its revenue and 30% of its manufacturing capacity reliant on the Chinese market. On the other hand, it is a double-edged sword, as US chipmakers such as Intel are making a lot of revenue from China. Thus if China decided to respond with similar measures, North American companies would experience serious problems.

It is worth mentioning that Intel is already taking action, by investing in Chinese ProPlus, which makes EDA (electronic design automation) software, and funding Fujian-based startup Spectrum Materials. That company produces gases that are broadly used in semiconductor fabrication plants. 

In addition, Trump is warning US pension funds against investing in Chinese equities. On May 12, the National Legal and Policy Center asked BlackRock to divest from the 137 Chinese companies currently listed on American stock exchanges. At least 11 have 30% or more Chinese government ownership.

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