Edison Research: Impact of coronavirus on financial services
Gaps in Chinese supply chains might take up to 12 weeks to work through the system. This is likely to be replicated in every country hit by the virus. And as many industries rely on a highly international supply chain, the results could be chaotic with different components going out of stock in a staggered way – effectively crippling production for many months. The more complex the product, the longer it will take for the full impact to emerge.
The impacts are also likely to hit smaller companies harder. When stocks are running low, larger clients will be prioritised. However, prices will increase. So whilst smaller companies could be left entirely bereft, larger companies will still struggle to retain profit margins.
The extent and likelihood of supply chain impact is set to become clearer next week.
Building materials such as taps, tiles, hinges and handles do not have complex supply chains. So, if Chinese imports are quickly restored, it will support the theory that production delays will be blips rather than full-scale collapses. In the meantime,companies outside of China are likely to be enjoying higher prices for their goods.
And there are other reasons to be cheerful – the practice UK companies have had with managing supplies and stocks given the uncertainties around Brexit will have sharpened their abilities to deal with coronavirus.
It certainly seems that one predictable trend seems is that the world is becoming less predictable.
Impact of coronavirus on Financial Services:
– Banks – lower interest rates and lending volumes will reduce revenues and credit losses will rise (with some delay) as a result of weakening economic activity. In addition revenue from trading activities could be negatively impacted from falls in the value of financial assets such as corporate bonds, and credit and interest derivatives. This will lower profitability.
– Asset managers – falling markets lower the value of assets under management and reduce fees but cash flows and balance sheets are generally very strong in the industry.
– Real estate – weakening economies lead to higher vacancy rates thus lowering rental income and raising costs. This tends to impact secondary space more than primary – Regional REIT are most exposed here. In addition, for overleveraged companies difficulty in rolling debt can create problems especially if there is a large development pipeline to fund
– Investment companies
Standard equity trusts relatively immune from a financial angle – assets will fall in value and NAV discounts will widen.
Private equity trusts – higher liquidity risk in these as they all have commitments to the underlying funds. Most have a controlled policy these days following the financial crisis, with back up liquidity lines too.
Credit vehicles – more risk here from defaults, especially in LBOW (higher LTV property backed lending), VTA (CLO equity and debt), MPLF (CLO equity and debt), EJFI (credit instruments in financial companies). These have generally quite diversified portfolios so you would need a large negative credit shock with high correlation to really damage them.
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