Infected Asia. How American businesses are losing money because of COVID-19

Updated on

Coronavirus led to the largest stock market crash in 10 years. Investors are selling stocks and energy resources are getting cheaper. The world’s wealthiest individuals are losing billions and Europe is reassessing the Schengen agreement. Economic forecasts are increasingly pessimistic. The global economy is about to be engulfed by a crisis, the consequences of which could dwarf the 2008 world financial crisis.

Get Our Activist Investing Case Study!

Get The Full Activist Investing Study In PDF

Q4 2019 hedge fund letters, conferences and more

Market mayhem

During four days, from February 24-28, stories about the spread of the coronavirus disease (COVID-19) globally and the panic it triggered resulted in $5 trillion in losses for companies whose shares are traded on international exchanges. This amount is equivalent to Japan's GDP. Next came the crash of stock markets in the United States, Europe and elsewhere in Asia. On February 24, the Dow Jones Industrial Average index fell 3.56%, Nasdaq composite index - 3.71% and the basket of 500 U.S. companies with the highest capitalization, S&P 500 – 3.35%. Bourses in Europe, Tokyo, Shanghai, Shenzhen and Hong Kong opened in the red. According to Bloomberg, five hundred of the world's richest people lost $444 billion in the last week of February due to stock market panic: Amazon founder Jeff Bezos - $14 billion, Facebook chief Mark Zuckerberg - $8.5 billion and Oracle founder Larry Ellison - $ 7.7 billion.

The speed and geography of COVID-19 spread had people around the world asking questions. "What is next?" "Will it be possible to keep the global economy from imploding?” “What will the post-pandemic world look like?"

OECD forecast

The Organization for Economic Co-operation and Development (OECD) at the end of February published a report, titled Coronavirus: the world economy at risk, outlining two scenarios. According to the pessimistic one, global economic growth in 2020 may slow down by half - up to 1.5%. This will happen if the pace of infection cannot be stopped in the near future. In this case, domestic demand in most Asian countries and consumption of goods in Western economies will decrease by 2%, and global stock indices and commodity prices - by as much as 20%. Under the optimistic scenario, the outbreak would be localized in the Asia-Pacific region. But even in this case, a drop is inevitable: global economic growth in 2020 will decline from 2.9% to 2.4% and will be the lowest since 2009. Moreover, the probability of an optimistic scenario is melting every day. According to the Johns Hopkins Institute, as of March 3, COVID-19 had already detected the virus in 70 countries and the number of infected people exceeded 90,000.

What do bankers expect?

Deutsche Bank Chief Economist David Volkerts-Landau shared his forecast with media: the EU will face a recession, and it will be especially severe in Italy. At the same time, bank experts believe that a deep recession does not threaten the global economy. According to their scenario, about 3 million people will contract COVID-19 around the world and 30,000 will die from it.

Bank of America analysts say the consequences of COVID-19 will be more serious. They downgraded their annual forecast for the global economy to 2.8%. The most negative side effect of the pandemic is the disruption of traditional supply chains and the rapid decline in the tourism business. President of the European Chamber of Commerce in China Jörg Wuttke agrees with this forecast. According to him, already in March, Europe will experience a shortage of industrial products in all sectors of the economy, including the pharmaceutical sector.

"Disruptions of supplies in the real sector of the economy are much more significant than many suggest,” the expert said.

Do you know which under-the-radar stocks the top hedge funds and institutional investors are investing in right now? Click here to find out.

Dangerous trends

Despite trade wars between the United States and China, the Asian market remains one of the most attractive for American business. The COVID-19 pandemic, however, has significantly impacted their plans and position: they have become the most unreliable partners. Shares of U.S. airlines and travel agencies have already fallen in price, including American Airlines, United Airlines, Delta Airlines, TripAdvisor, Expedia Group, Royal Caribbean Cruises, and others. McDonald’s temporarily closed restaurants in five cities in China's Hubei Province. Starbucks intends to resume operations in half of its coffee houses in China, which were temporarily closed. Twitter has encouraged employees from Hong Kong, Japan, and South Korea to work from home. Earlier, Apple temporarily closed all of its 42 stores in China. A week of downtime costs the company $850 million. At the end of January, Disney closed two of its theme parks in China. As a result, in the second quarter, the company's management predicts losses of $175 million. Large and medium-sized American businesses are facing enormous losses.

Steve Wynn's tourism empire

Steve Wynn has been dubbed the King of Las Vegas. In 2002, he founded Wynn Resorts Limited, a luxury hotel and casino operator. Since 2006, the company began expanding into the Asian market. In the administrative district of China's Macau, he owns three resort complexes - Wynn Macau, Wynn Palace and Encore at Wynn Macau. According to various estimates, the share of Chinese business in the operator’s income structure amounted to 75%. In 2017, shares of Wynn Resorts Limited grew by 44% and the establishments in Macau were recognized as the best recreational facilities in Asia.

It is unlikely COVID-19 will be able to destroy such a powerful business empire, but it will certainly cause multimillion-dollar losses. As of March 4, shares of Wynn Resorts Limited fell 3.18%. The chain announced the temporary closure of some of its venues, including restaurants and shops, in connection with the epidemiological threat. The hospital and development company's website offers to book rooms in Macau with a 15% discount, but this will not fix the problem. Sectors of the economy associated with the movement and congestion of people are the most vulnerable during the pandemic. These include logistics and transportation, recreation, catering, and entertainment. First, for safety reasons, the vast majority of the population avoids crowded places. Secondly, none of these segments (with the possible exception of transport) can be categorized as first-necessity segments. Thirdly, during the pandemic, people stopped booking rooms not only at Wynn Resorts Limited but also at their competitors. Consumers of services do not redistribute costs, but completely abandon them, thereby reducing overall consumption in the country.

Michael Blum’s gaming and investment adventures

Like Wynn, entrepreneur Michael A. Blum has a long business history in Asia, primarily in hotels, casinos and venture capital investments. Blum himself was born in Hong Kong. At the start of the 2000s, the future investor worked in various IT companies. At one time, he was a senior manager at the German PayPal division and responsible for product promotion in Southeast Asia and the Pacific. PayPal earned its first serious profit by selling shares, of which $200,000 paid for a ticket aboard Virgin Galactic's SpaceShip2 (SP2). Blum has long been interested in NewSpace ventures, but two of his projects (XCOR space tour operator and manufacturer of Firefly Systems launch vehicles) flopped, leading to the bankruptcy of companies in 2017, while Blum remained under suspicion of fraud.

These failures did not prevent the businessman from actively developing his business in Asia. Together with his brother Dirk, Blum founded the investment fund LFTG Holdings in Macau, specializing in local gambling and hotel business. The fund still manages real estate in Hong Kong. In July 2013, Blum co-founded a venture fund and a management company with assets that include casinos and hotels in Southeast Asia - Asia Leisure Capital Ltd. Their first project is Naka Resort, located on the border of Thailand and Laos. As is the case with Steve Wynn, Blum's hotel business is incurring significant losses. The business and investment climate in Asia as a whole is directly dependent on the decline in tourism and the general panic caused by the COVID-19 pandemic.

Chevron's oil business

Michael Wirth is Chairman of the Board and CEO of Chevron, a large U.S. energy company that is actively developing deposits in Asia, including in China, Thailand, Indonesia, Bangladesh and other countries in the region. The oil industry was one of the first to be impacted by COVID-19. The temporary shutdown of enterprises, traffic restrictions, and the paralyzed tourism sector collapsed oil consumption in China by 25% in February.

According to the Financial Times, compared with February 2019, this drop is equivalent to more than 3% of global consumption. In March, demand is expected to be 10% lower than a year earlier.

“Production activity declined, passenger traffic dropped by 70% and freight traffic decreased by 50%. It is absolutely certain that at least in the next two weeks there will be a complete lull in the Chinese economy,” said Michal Meidan, Director of the China Energy Programme for The Oxford Institute for Energy Studies.

As a result, oil companies are forced to halve production and processing. Even with such measures, a number of companies increased stocks by more than 50%. Downtime is expensive. For example, Chevron shares fell 2.26%. More than a thousand employees from European offices have been told to work from home. Offices in the United States could be downsized due to losses from falling oil prices. Chevron lost $10.4 billion last quarter as a result of field depreciation and the effects of the pandemic.

What's next?

No one today wants to predict how bad the economic collapse will be, what companies and industries it will affect and, most importantly, how long it will last. But analysts agree on one thing: it all depends on the severity of the pandemic. The global economy has already experienced similar shocks. In 2002-2003, the SARS virus hit the Asian markets seriously and cost the world $50-100 billion. The current pandemic could inflict even more damage to the global economy and businesses operating in the Asia-Pacific region, according to Hung Tran, Nonresident Senior Fellow, Global Business & Economics at the Atlantic Council.

Ultimately, time will tell how events will unfold and how severely the international economy will suffer because of the deadly virus.

Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!