- Death toll rises to 600 with more than 30,000 people infected
- Car industry and its supply chains face difficult challenges given the number of production hubs located in Wuhan, Hubei
- Clothing retailers see Chinese customers as one of their key target groups
- Hotel chains and travel leisure companies hit by tourist groups cancellations
Coronavirus has claimed around 600 lives so far, with more than 30,000 people infected. The virus outbreak has impacted the markets, along with certain sectors sustaining a lot of damage, while China has injected billions of dollars to help its struggling domestic market.
Given the uncertainty that the coronavirus creates, it is best to avoid investing in these five stocks for the reasons that will be outlined below.
BorgWarner, a major supplier of turbochargers and electric motors for car makers, has been strongly hit by the coronavirus outbreak. As well as other members of the auto industry, BorgWarner is strongly reliant on Chinese suppliers and manufacturers.
BorgWarner stock price lost around 20% in January, in addition to 2% in the first week of February. Two weeks ago, the company announced it had acquired its rival supplier Delphi Technologies in an all-stock transaction worth around $3.3 billion.
Investors are concerned that coronavirus concerns will cause additional damage to the car industry and especially the industry’s global supply chain, which is heavily dependent on China.
Many manufacturers have closed their production hubs upon instructions from the Chinese government, as they fear further virus spreading. Coronavirus presents the latest hit on the global car business, which is already facing slowing sales and falling profit margins.
PVH Corp. is a US-based clothing company. Although the name itself doesn’t ring a bell, it owns such famous brands as Calvin Klein, Van Heusen, Tommy Hilfiger, etc. PVH’s dependency on China isn’t surprising given the overall importance of China as a market for retail clothing companies.
The PVH stock price dropped 17% in January, in line with the rest of the clothing industry. Bank analysts believe that the coronavirus may make a stronger impact on this industry than the SARS virus had made in the early 2000s.
“China now has a much bigger input to revs/EPS for global brands. The rate of retail sales growth in China slowed by about half during the peak of SARS,” Credit Suisse analyst Michael Binetti said.
The bank estimates that PVH has around 7% of its annual revenue coming from China.
The hotel industry finds itself in a conundrum similar to that of the clothing retailers. According to reports, around 3 million Chinese tourists visit the US annually. Travel agencies have already cancelled tour groups and closed major tourist destinations.
“It is problematic. We’re watching this closely. If fears of contagion escalate, the impact on the hotel industry could be “material,” said Tyler Morse, the CEO of hotel chain MCR.
Marriott, the world’s largest hotel chain, said that tourists from China accounted for around 7.5% of its annual revenue last year. Following the record month of December when the Marriott stock price printed the fresh all-time high at $153.39, the coronavirus outbreak saw the price move sharply lower to the low $130s.
Shares of Carnival Corporation, the world’s largest travel leisure company, recorded the lowest trading performance since December 2018. The company was in spotlight in the past few days after Japan said it will not allow its ships to visit the country over coronavirus concerns.
“We are quickly working to develop alternate plans and are keeping guests updated on board as information becomes available,” said the company in a statement. Carnival is already implementing the policy of “enhanced screening, prevention, and control measures for our ships, guests, and crew”.
One of the company’s ships is already placed in quarantine by the Japanese authorities for two weeks, while national health workers test all passengers on the ship. According to local authorities, more than 60 passengers have been diagnosed with coronavirus so far.
One of Carnival’s main competitors, Royal Caribbean, has already cancelled 8 tours from and to China.
Honda is one of the car companies with the largest exposures to Hubei, a province in China where the coronavirus appeared first. Its capital city Wuhan is home to Honda’s three assembly plants, which make up to 600,000 vehicles a year.
“We have a feeling that when results hit the tape, there could be an impact,” says RBC Capital Markets analyst Joseph Spak, before adding that the factory shutdowns will “cause the loss of about 90,000 vehicles in Hubei alone”.
Initially, the company suspended production activities until February 14, with that date now being prolonged until February 17. If there are no further disruptions, Honda senior management believes it will not have much of an impact.
“We can expect the rebalancing of the entire supply chain is effectively going to take more than just a week, because there is a huge backlog in demand domestically and for export,” said Guenter Butschek, chief executive officer of India’s Tata Motors.
Honda stock price fell nearly 9% in January to hit the lowest levels since October. Further disruptions in the functioning of the company’s Wuhan plants can see the price slide further down towards the 8-year low of ¥2412.
Coronavirus has been threatening to cause major challenges to the global economy as the number of infected people has risen above 30,000 in the previous week. Certain sectors, such as hotel chains, travel leisure companies, clothing companies, as well as car producers and their supply chains have been hit severely over the past few weeks.
Investors will be monitoring closely whether production hubs will open as planned in the mid-February, or will local authorities force further shutdowns amid fears of the further virus outbreak.
It is almost certain now that the Q1 results of numerous companies will be lower than expected due to the coronavirus outbreak. We may have more information next week on how deeply this could cut into sales results, and whether it will affect earnings, however, it is still best to stay away from these stocks as there are too many question marks surrounding them.