As the rest of the world locks down in attempts to slow the spread of the COVID-19 pandemic, China is starting to lift restrictions and is showing signs of returning to normal. Perhaps the most telling sign is the state of brick-and-mortar Apple Stores.
As part of China’s unprecedented response to the viral outbreak, Apple temporarily closed all its Chinese stores in February. With China being the company’s second largest country market, Apple retracted its earnings guidance on February 17th, guidance that was released less than a month earlier on January 28th. Chinese iPhone sales were down to 494,000 units in February 2020 – compared to 1.27 million units in February 2019.1
A month later, on March 13th, Apple closed all of its stores outside of China and reopened all 42 locations within the country. As of today, the only place on the planet where you can shop inside an Apple Store is in China.
First one in, first one out?
As the COVID-19 situation in China appears to be contained – the reported rate of new cases is very low and generally related to travellers arriving from overseas – restrictions have been eased after 2 months of extreme lockdown in the worst affected areas of the country.
While China has enacted restrictions on foreign arrivals, within China, travel restrictions surrounding the Hubei province have been lifted. China is allowing people to finally leave the province, even to return to major cities like Beijing and Shanghai. Returnees from Hubei are still required to self-isolate at home for 14 days, so not completely all clear, but progress is being made. Travel restrictions to Wuhan, capital city and ground zero within Hubei province, were lifted as of 12:00am, April 8th (local time).
Cinemas remain closed, but malls have reopened. While restaurants are mostly still takeout only, a friend in Beijing posted about going out for hotpot for the first time in months. Like shopping in an Apple Store, dining in restaurant, it seems, is also largely an in-China-only activity these days. The Beijing zoo reopened outdoor exhibits at 30% capacity. Offices are still cautious (combining work from home, rotating schedules, alternative workspaces) and social distancing rules are still being applied. So, while China has COVID-19 seemingly under control and is getting back to work, it is still far from normal.
The data suggests it’s back to business
As revealed in the incoming data, economic activity in China is on the rise. Indicators such as electricity production, consumption, traffic congestion, and air pollution are increasing once again, all suggesting that industrial production is ramping up.
According to China’s National Bureau of Statistics, Purchasing Managers’ Index readings (an indication of general economic trends in the manufacturing and service sectors) collapsed from 50.0 (no change, but healthy) in January to 35.7 (major contraction) in February. It has since rebounded to 52.0 (expansion) in March.2 While this doesn’t mean things are back to normal, it does show economic activity has stopped decreasing and is recovering.
The National Bureau of Statistics also reports that work resumption rates at large enterprises is up to 98.6% as of March 28th.3 The Ministry of Industry and Information Technology reports that work resumption for small and medium sized enterprises is up to 76.8% as of March 29th.3
Like much of the official data provided about infections and deaths related to COVID-19 in China, there has been a lot of scrutiny over these numbers. To get a better sense of actual recovery activity, we have spoken with GMO, our sub-advisor partner on the MDPIM Emerging Markets Equity Pool, about their conversations with Chinese management teams and their contacts on the ground. At this time, their sense is the recovery in activity does seem real in terms of getting back to full productivity.
Keeping an eye on less developed emerging markets
As the epicenter of the viral outbreak has shifted to the U.S. and Europe, there is a growing concern for less developed emerging markets. Many of these countries such as India, Indonesia and Brazil have large populations in crowded cities that are generally less prepared to combat the pandemic given fewer resources to manage the medical challenges and also fewer tools to manage the economic fallout (such as monetary and fiscal policy flexibility).
The MDPIM Emerging Markets Equity Pool is relatively defensively positioned at this time. The Pool has had a greater focus on east Asian countries with overweight positions in Chinese, Taiwanese and Russian markets (which are better resourced to meet the challenges). The Pool is underweighted in India and Brazil.
It’s interesting to note that the Chinese market is the best performing market year-to-date and many holdings in the Pool have performed well. In contrast, many other emerging markets like Brazil have experienced sharp selloffs. GMO has mentioned that they are looking for opportunities to rotate out of Chinese names which have held up well, potentially into some other markets which may offer better investment opportunities, once signs of stabilization in the global economy become clearer.
For more information about current markets or your portfolio, please do not hesitate to contact your MD Advisor*. She or he would be happy to answer any questions you may have.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 https://www.bbc.com/news/technology-51870725
2 https://www.cnbc.com/2020/03/31/china-reports-march-manufacturing-pmi-amid-coronavirus-outbreak.html
