Japan’s PMI for February has come in at 47, much below January’s 50.1. A reading below 50 indicates contraction from the previous month. Similarly, Australia’s flash composite PMI for February shows activity shrank to 48.3, down from 50.2 in January, with bushfires and the virus contributing to the decline. The silver lining is the Flash PMI for the Eurozone came in at a six-month high, indicating that the region has so far remained immune to the effects of the virus.
As for China, its Emerging Industries PMI (EPMI), a gauge of momentum in high-tech industries, slumped to a historic low of 29.9 for February, a huge fall from 50.1 for January.
The question is: will the recovery be V-shaped?
Chinese authorities say there has been resumption of 80% of work in key foreign enterprises in many regions. The credibility of the pronouncements of Chinese authorities is even less than its normal dismal level at the moment, but Foxconn has said it will ‘cautiously’ resume production, while Apple issued a revenue warning for the quarter. The virus has spread to Beijing, with a report saying that infection density in Xicheng district, which houses the headquarters of the Chinese Communist Party and government offices, is only slightly lower than in Wuhan, the centre of the epidemic.
Nevertheless, a torrent of cash continues to flood into markets around the globe. Indeed, as on 20th February, the MSCI China index was up 1.8 percent year to date. Virus? What virus? That’s what Chinese equities seem to be saying. Other markets in the region have fared far worse, with MSCI Japan, Taiwan, Korea, Thailand, Indonesia, Malaysia and the Philippines all in the red compared to the beginning of the year. The Chinese government has been doing a good job of making stock markets defy gravity.
The Bank of America survey found that emerging markets are the most favoured destination for global fund managers and India continues to benefit from that trend. Nevertheless, the Indian markets have been cautious recently. The macro situation hasn’t improved much and Corporate India’s December quarter results were poor and the current quarter could be worse.
What Indian industries are impacted by this?
The brighter side is that the fall in commodity prices is good news for an economy that imports oil. But that's not all that India imports, and China is a key market for consumer goods, finished industrial goods, intermediates and basic goods. Even for India, China contributes to 15% of intermediate imports.
While companies like Tata motors results will be impacted with sales slowdown in China, Auto components, Pharmaceutical companies with APIs, and the likes are dependent on supplies from China.
What should India do?
Make a structural change by becoming an alternative manufacturing destination for the world. The government should use this opportunity to invite companies to invest in India, make land acquisition laws simpler and cheaper, by relaxing labour laws and go all out to show that it's open for business. Simplify GST. Tax rates have already been lowered, which is a good thing. Having worked internationally in large corporates I know that companies are very worried about this supply chain dependencies on china....and are definitely looking for Plan B.
Will India use this opportunity and become world's manufacturing Plan B?