The coronavirus outbreak in China is taking a heavy human toll, but investment bank UBS warns it will also take a large economic toll, including in Australia.
- UBS said the group travel ban alone could cost Australia at least $1 billion in services exports to China
- Travel agencies, airlines, airports, casinos, luxury retailers and educational institutions are most directly affected
- But several large healthcare firms and gold miners may receive a boost to earnings from coronavirus
New research by UBS Australia’s share analysts and economists has attempted to identify the sectors and companies most affected, and the overall cost to the economy.
While they say it is far too early to know the total cost, just the group travel ban by the Chinese Government, which will stop many tourists leaving the country during the peak Lunar New Year holiday period, could directly cost Australia at least $1 billion in services exports.
“However, if travel disruptions are extended, or expand to cover independent travellers, the cost could be much greater,” the report warned.
Global share markets have fallen only modestly since the coronavirus outbreak intensified, but some sectors such as travel and leisure have been hit much harder than others.
“Due to the virus, currently we expect only mild downgrades to global economic growth and corporate profits,” Nikko Asset Management’s chief global strategist John Vail wrote in a note.
“China will be affected the most but, as it is such an important country for supply chains and its demand for goods and services (especially its large tourist contribution), other countries will feel some pain too, at least temporarily.
“A decent portion of the absence of Lunar New Year spending in many cities and extended holidays will not likely be made up by future spending and production.”
The analysts warn these costs could also escalate dramatically if the new strain of coronavirus spreads globally, like the swine flu pandemic of 2009, which infected 11-21 per cent of the world’s population.
The mortality rate for swine flu was 0.02 per cent, whereas mortality rates for the novel coronavirus are currently running at 2.2 per cent.
Unlike the 2003 SARS outbreak, the new virus appears able to be transmitted before carriers are showing any symptoms, making it much harder to effectively locate and quarantine affected people.
However, the UBS analysts also noted that Chinese authorities had acted more quickly and decisively in attempting to contain the coronavirus outbreak.
It is these widespread efforts to contain the virus that are causing the immediate short-term economic disruption, as travel is cancelled and large swathes of Chinese industry remains shut down.
Travel and education vulnerable
This means that, even if Chinese and global health authorities are successful in limiting the spread of the new coronavirus, it will cause noticeable negative effects on the earnings of many major share market-listed Australian firms.
UBS said there was an immediate and obvious effect on companies involved in travel with a large Chinese customer base.
Australia’s two big casino operators — Crown and Star — rely heavily on high-rollers, or “VIP gamblers”, from China.
“We estimate VIP volumes could be down 50 per cent with some loss of play from both international and domestic main floor,” UBS forecast.
“We believe this could drag financial year (FY) 2020 EPS (earnings per share) by circa 10 per cent and FY21 EPS by circa 20 per cent.”
Among travel agencies, UBS said Corporate Travel is heavily exposed if companies continue cutting back travel to China, with Asian business travel making up about 20 per cent of its earnings.
The bank’s analysts say Webjet and Flight Centre have much lower exposures to China, and will only be severely affected if the outbreak spreads to more popular tourist destinations such as Bali and Thailand.
If the current outbreak has the same impact on Asia-Pacific travel as SARS did in 2003, UBS said Qantas could lose about $500 million in earnings and Virgin $60 million, while Sydney Airport could see a 5 per cent downgrade in operating cashflow.
Australian retailers and shopping centres exposed to the Chinese luxury market could expect a hit, with some of Vicinity and Scentre’s operations popular with Chinese visitors.
A slowdown in Chinese students travelling to Australia would hit listed companies such as IDP Education, where about 25 per cent of enrolments are Chinese nationals, as well as Australia’s university sector more broadly.
UBS also noted that Treasury Wine Estates was vulnerable to reduced Chinese consumption, as that export destination made up about 15 per cent of its earnings.
Demand for iron ore and coal is also likely to fall if large sections of Chinese industry remain shut down for an extended period in efforts to contain the virus, resulting in lower prices and profits for Australia’s big producers.
However, while the economy and many companies will lose revenue due to coronavirus, others stand to benefit.
Gold prices are likely to rise as investors seek safe havens for their money amid economic uncertainty.
UBS said health-related companies, such as vaccine maker CSL, protective equipment manufacturer Ansell and ventilator producer ResMed could also see increased demand.
Local healthcare providers Sonic and Healius may also see increased GP visits if people feel they have coronavirus-like symptoms.
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