Structured thinking uses the structure of things as the object of thinking to express and analyze problems, for example, from the top to the bottom, by grouping and progressively.

 

When faced with many complex financial problems, this way of thinking can often help you sort out your ideas and solve problems efficiently.

 

Starting with the Coronavirus outbreak that everyone is most concerned about recently, we will take a structured way of thinking to guide you through why it can affect the world.

 

How should we view the global impact of the Coronavirus Outbreak?

 

We answer this question in two steps:

 

First, how does the Coronavirus epidemic affect human economic activities from a micro perspective.

 

Then, it is the situation and development trend of countries infected by the Coronavirus.

 

◇ To answer the first question, we need to look at both supply and demand.

 

The impact of the Coronavirus epidemic on supply is that it prevents companies from concentrating the workforce and lowers productivity.

 

Because the Coronavirus is highly contagious, in order to control the spread of the epidemic, it is often necessary to take compulsory measures to limit population accumulation, which will make it difficult for companies to concentrate the workforce. Industries such as manufacturing, which require workers to work in the workshop, are most affected in this regard. Worse still, if the epidemic spreads and the death toll rises, productivity will stagnate. (We will dynamically follow up the development data of the epidemic)

 

On the other hand, the Coronavirus epidemic will have both direct and indirect effects on consumer demand.

 

The direct impact is that consumers will reduce or avoid some consumption that requires population gathering.

 

For example, dining out, shopping in shopping malls, entertainment such as bars, KTV, etc., participating in large-scale rally events such as concerts, flying, trains, subways, buses, and other large closed transportation vehicles.

 

In addition, errors in controlling population accumulation can lead to accelerated virus transmission.

 

For example, the "super transmitter" incident in South Korea has led South Korea to become the world's second-most infected country, expanding the impact of the epidemic from the demand side to the supply side. South Korea is not as vast as China, who after sealing off Hubei province, still has many provinces to produce. If an epidemic occurs in economic centers such as Seoul, South Korea ’s output will be severely affected.

 

The indirect impact of the Coronavirus on consumer demand is that after the epidemic affects the production activities of manufacturing enterprises and service industries, it will reduce the income level of workers, thereby further reducing consumer demand.

 

In addition, if the epidemic continues to spread, it may cause the affected SMEs to close down when the capital chain is broken, which then further spreads from the demand side to the supply side, and spread to other industries through the "employment-consumption" channel, forming a long-term overall impact.

 

For example, in mainland China, some catering companies have suffered crises in the past two months. At present, the catering (dining) and entertainment industries cannot reopen until at least the end of April.

 

From the above analysis, the impact of the epidemic on economic activities has a highly structural feature, and it does not hurt all economic activities indiscriminately in the short term.

 

Situation of Global Outbreaks

 

As mentioned above, the three main regions that are currently affected are Mainland China (mainly Hubei), South Korea, Italy, and Iran.

 

 

◇China:

 

The global economic impact of the outbreak in China lies in two aspects:

 

Firstly, China's consumption of goods and services from other countries, such as transnational tourism and consumption of imported goods, will decrease. For example, countries that depend on exports to China, such as Australia, South Korea, New Zealand and Brazil, may experience a slowdown in economic activity in the first quarter.

 

Secondly, China's industrial finished goods exported to other global economies will decrease during the epidemic. Both aspects will reduce the economic performance of economies with which China has close trade relations in the first quarter. For example, iPhone production in the United States will be limited, and American brides will not be able to buy wedding dresses.

 

But as China ’s epidemic situation has been initially controlled, China ’s supply to other countries as the world’s factory will return to normal soon.

 

◇ South Korea:

 

Judging from the cumulative number of cases, South Korea is already the second highest level in the world, and there is still the risk of continued expansion.

 

In fact, it is difficult to control the spread of the epidemic from the current measures of the South Korean government. In the future, the collapse of some industries may affect the consumption of other industries, which will have a long-term overall economic impact.

 

◇ Southeast Asia:

 

The number of cases in Japan and Singapore has increased, but it is still under control. The economic impact of the outbreak is expected to be very limited. Of course, this conclusion needs to depend on the authenticity of the current number of cases disclosed.

 

The number of emerging cases in India, Malaysia, Vietnam and Thailand, which are emerging manufacturing countries, is small and growing extremely slowly. The economies of these countries are relatively limited by their own epidemic situation, and in the first quarter, more manufacturing opportunities may be obtained due to the shutdown of some Chinese manufacturing industries. However, the risk of the spread of the European epidemic will affect the exports of these countries, but the risk is currently small.

 

◇ Australia:

 

The outbreak was minimal in Australia. It is worth mentioning that the impact of Australian forest fires on its economy is what we need to pay attention to. Australia mainly supplies raw materials and commodities in the global industrial chain, and asset prices in this regard need our attention.

 

◇ North America:

 

There are currently 127 confirmed cases in the United States. Although they have risen in recent days, the overall situation is still manageable, and their economic impact will be very limited. However, it should be noted that the current outbreaks of new crown virus in the United States are mainly concentrated in Seattle and San Francisco, which may impact the local technology industry.

 

Canada has 33 confirmed cases, and the number of new cases is low. The impact of the outbreak on Canada is also very limited.

 

◇ Europe:

 

The situation in Europe is less optimistic.

 

The number of newly confirmed cases in Italy is also over 500. And the epidemic in Italy is concentrated in northern Italy, which is the economic engine of Italy. The per capita GDP of northern Italy is 35,000 euros, while the national average is only 29,000 euros. This has taken a toll on Italy's machinery, clothing and tourism industries.  And, if the epidemic continues to spread, Italy ’s economy may fall into recession - Italy ’s GDP growth in 2019 is only 0.3%, and negative economic growth this year is imminent.

 

On the other hand, Italy mainly exports agricultural products, machinery, vehicles and clothing in the global industrial chain. The epidemic may affect Italian companies' global market share in these industries. Externally, lower demand in Italy may affect its main trading partners - Germany, France and China.

 

Cases have increased in France, Germany, Spain, Switzerland and the Netherlands over the past week. Due to the ease of population movement within the European Union, and at the current stage the measures for controlling the epidemic in Europe are not strict, the spread of the new crown virus epidemic in the European continent poses certain risks.

 

◇ Crude oil supply countries:

 

The epidemic is spreading extremely fast in Iran and has become the fourth most infected country. The number of new patients has surged at a rate of more than 800 people / day, ranking first in the world. Iran's crude oil production is likely to be affected.

 

The outbreaks in Saudi Arabia, Iraq and Russia are minimal, and their crude oil output will not be affected by the outbreak. Recently, Saudi Arabia is also seeking a new round of crude oil production cuts, which is expected to fall by millions of barrels per day. And because of Iran ’s potential risks, if this plan is implemented, it may reduce the impact of rising oil supply in the United States, making crude oil prices rebound in the middle of this year.

 

So, how should we adjust our investments?

 

The Coronavirus epidemic has indeed affected the global economy, but because of its structured and regional characteristics, not all industries and all markets will be indiscriminately harmed in the short term.

 

For example, we will see: The rise of China's TMT industry, because the industry is less affected, and instead benefits from the rise of remote office and "home economy". Countries such as South Korea, Italy, etc. are hit hard due to industry dependence.

 

So how should we adjust our investments?

 

Combining the above analysis, we can consider that:

 

• In terms of industries, we need to avoid the aforementioned affected industries in the short term, and invest more in less affected industries such as TMT and Utilities.

• Geographically, avoid Korean assets and Italian assets, including the Korean Won (KRW) and Euro (EUR), and try to use global asset allocation to spread risk.

• Chinese assets can be properly allocated in the TMT industry after the first quarter earnings are released.

• In terms of energy, we believe that if the Iranian epidemic continues to spread, crude oil production may decline, coupled with Saudi Arabia ’s crude oil reduction plan, the current crude oil price will be a good entry point.

 

In terms of timing, we believe that based on avoiding high-risk industries and regions, we can now start to build/add positions step by step:

• First of all, the current S & P 500's dynamic P / E ratio has dropped below 17, which is much cheaper than 19 at the beginning of the year, but it is still slightly higher than the level of about 16 in the past two years. The step-by-step position construction can capture the current relatively low valuation. Lower costs can be obtained after further market adjustments.

• Secondly, global central banks have basically reached agreement on cutting interest rates and maintaining growth, and market liquidity is expected to be better in the next period.

 

In the end, we still want to emphasize again that whenever the market is affected by a certain factor, we should refuse to panic, but rather use structural thinking, does it really hurt so much?

 

Looking back, we will eventually find that many negative factors are only in a "certain" range and do not have large-scale effects, and the market may find vents for "other" reasons.

 

When the impact of these negative factors is gradually digested, the oversold part will be priced correctly. Before that, it will the best time for us to invest.

 

Now look back at the information on the epidemic. You may be seeing a screen full of numbers and panic speeches. Do you now feel that your understanding is clearer?

 

Hope this helps.

 

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

 

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