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Coronavirus dents shares, but impact may be limited

Nicki Bourlioufas  |  10 Feb 2020Text size  Decrease  Increase  |  
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The coronavirus outbreak will weigh on the earnings of leisure and education companies and those selling consumer goods into China, but experts say the effects will most likely be short-term.

Peter Warnes, Morningstar head of equity research, said the tourism and education sectors will likely be hit hardest followed by companies exporting consumer goods to China.

He points to Treasury Wine Estates (ASX: TWE), which has already experienced a sharp fall in its share price after an earnings downgrade and says more could come from the beverages company.

“We could absolutely see another downgrade from Treasury Wine Estates as consumption in China will be affected by the outbreak with people staying at home and not travelling.

“Asian operations represent about 48 per cent of Treasury’s group operating profits compared to around 23 per cent for Australia and New Zealand and about 27 per cent for the Americas,” says Warnes.

Travel-related companies too will suffer with a drop in Chinese visitors, who spend much more than others.

“With over 1.4 million visitors in 2018-19 year, Chinese are by far the biggest spending tourists in Australia and spend at least double what tourists from any other country spend on a per capita basis.

“So, hotel and tour operators will be hit by a drop in tourist numbers. Crown Resorts (ASX: CWN) and Star Entertainment Group (ASX: SGR) too are down because there will be fewer Chinese high-rollers visiting those casinos, so their earnings will be impacted.”

Warnes notes that tourism and education exports bring in a combined $60 billion a year and are the nation’s biggest exports after iron ore, coal and natural gas.

A sharp fall in student and tourist numbers will likely trim some economic growth off for the March quarter, with some of that impact carrying on into the second quarter.

According to the ABS, China was the largest source country of short-term visitor arrivals in 2018-19 at 1.43 million, with New Zealand in a second place at 1.41 million, but this could drop in 2019-20 with the outbreak and travel bans.

Following the SARS outbreak 2003, overall tourist numbers dropped, as highlighted in the chart below. Experts are predicting will now be repeated.

Short-term visitor arrivals, Australia — June 1979 to June 2019 

Short-term visitor arrivals, Australia — June 1979 to June 2019

Source: ABS, Overseas Arrivals and Departures, Australia, Nov 2019

UBS says while the impact of the coronavirus is difficult to quantify, stocks exposed to the Chinese consumer (Treasury Wine Estates), Chinese shoppers in Australia (Scentre, Vicinity, Crown, Star), Chinese students (IDP Education) and tourism (Qantas, Virgin, Sydney Airport, Flight Centre, Webjet, Corporate Travel) are most likely to be affected. Health care stocks could experience higher demand, while lower commodity prices are a negative for resources.

“As with SARS, the coronavirus looks set to have a material impact on GDP, retail sales and tourism,” writes UBS, which estimates a two-month halt on China package tours could directly cost Australia at least $1 billion in services exports.

However, Warnes says Sydney Airport (ASX: SYD) and larger companies like Qantas (ASX: QAN) face minimal exposure at this stage because earnings from Chinese travellers don’t make up a huge proportion of their overall revenue, as they may do for smaller operators.

“It’s a short-term thing so I think the impact on their profitability will be limited.”

According to IG Markets, equities with the greatest exposure to iron ore such as Fortescue Metals Group (ASX: FMG) and Rio Tinto (ASX: RIO) could also be affected in coming months, with iron ore one of the hardest hit commodity prices this year.  

Fortescue has however rallied over the year to date, up 5.3 per cent to 6 February, compared to 0.8 per cent for BHP Billiton (ASX: BHP) and a fall of 1.6 per cent for Rio Tinto, highlighting a relatively muted impact from the coronavirus.

Broader economy to take smaller hit

Reserve Bank governor Philip Lowe says in the short term, the bushfires and the coronavirus outbreak combined “will temporarily weigh on domestic growth”.

But longer-term growth prospects remain more positive for Australia than they were in 2019, with consumption growth picking up.

“The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction,” Lowe said in a recent statement on monetary policy.

is a Morningstar contributor.

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