RPT-GRAPHIC-Three months that shook global markets

(Repeats story from Sunday)

By Marc Jones

LONDON, March 29 (Reuters) – How much damage has the coronavirus and the oil price collapse inflicted on global financial markets this year? Put simply, it has probably been the most destructive sell-off since the Great Depression.

The numbers have been staggering. $15 trillion has been wiped of world stock markets, oil has slumped 60% as Saudi Arabia and Russia have started a price war and emerging markets like Brazil, Mexico and South Africa have seen their currencies plummet more than 20%.

Volatility and corporate borrowing market stress has spiked on worries that whole sectors could go bust, airlines have had half their value vaporised, while cratering economies risk a new wave of government debt crises.

“It has been like a train wreck,” Chris Dyer, Director of Global Equity at Eaton Vance, said. “You could see it coming and coming and coming, but you just couldn’t stop it happening.”

That carnage has seen 22% and 24% slumps for Wall Street’s Dow Jones and S&P 500, almost 25% for MSCI 49-country world index and 27% for London’s internationally exposed FTSE.

For reference, the record quarterly drop for Wall Street was 40% in 1932 in the midst of the Great Depression. The fact that the S&P and Dow were at record highs back in mid February has made the crash this time seem more brutal.

Stocks in China, where the virus hit first, have faired relatively well in comparison with only an 11% drop in dollar terms, but the impact on other major emerging markets has been devastating as their main commodity markets, and currencies, have also collapsed.

Russian stocks, which topped the tables last year, have been routed 40% in dollar terms. South Africa, which was stripped of its last investment grade credit rating on Friday, has fallen by the same percentage, though Brazil has been the worst, plunging 50%.

A large part of that is down to some wild FX market moves. All three of those countries have seen their currencies lose over 20% this year, which also ties in to the commodity market carnage.

Brent crude oil has fallen by 62% in the quarter to just $25 a barrel. This was not only because of the coronavirus crisis, but also the price war between Saudi Arabia and Russia, which is putting their public finances at risk.

Industrial metals like copper, aluminium and steel have all dropped 15-22% and some agricultural staples like coffee and sugar are down 17% and 10%.

“These are truly historical moments in the history of financial markets. 2020 will go alongside 1929, 1987 and 2008 in the text books of financial market panics,” Deutsche Bank Strategist, Jim Reid, said.

GIVE ME SHELTER

So are there any places to shelter? Yes, but not many.

Sit-on-your-sofa-suited stocks like Netflix and Amazon have risen 10% and 2.5% respectively and some specialist medical equipment companies have surged.

Ultra-safe U.S. government bonds have returned 13% as the Federal Reserve cut U.S. interest rates to effectively zero, leading a charge of around 62 interest rate cuts globally.

The dollar has rocketed against emerging market currencies. It had also shot up against the majors too, but has eased back over the last two weeks and will end the quarter only 2% up against those bigger currencies.

This has left the Japanese yen, the other traditional FX safe-haven, with only a 0.4% gain. The Swiss franc is down against the dollar, although it has climbed steeply against the euro and many other currencies.

Will April bring much relief? JPMorgan reckons the coronavirus will have pushed the world economy into a 12% contraction in Q1 and with pandemic still spreading rapidly and keeping large parts of the global economy shuttered it is unlikely to get much easier in Q2.

The cavalry has arrived though. G20 governments have promised a $5 trillion revival effort, major central banks have cut rates and restarted asset purchases. Markets bounced big last week until Friday came and may still end Q1 on a relative high.

Stephane Monier, Chief Investment Officer of Lombard Odier, is looking to see whether infection rates in Europe and elsewhere peak as they did in Asia. If they do, markets could see a V-shaped 30% recovery, although if they do not and cases jump in Asia again as lockdowns are lifted, it could be akin to a “war” situation which would impact the economy for 1-1/2 years.

“Our expectation is for a very volatile second quarter,” Monier said. “It is important to keep in liquid, high-quality assets.”

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Pandemic speeds up iPhone makers' plans to exit China

Wistron Corp, one of Apple’s manufacturing partners, said last week that half its capacity could reside outside China within a year.

The declaration underscores how the Asian assemblers that keep the world supplied with iPhones and other gadgets are shifting to a higher gear after the coronavirus showed the folly of staking everything on one country.

The move to shift production out of China has been under way since the trade war between Washington and Beijing reached its zenith last year.

Now, the Covid-19 pandemic is expediting that. Decisions by companies such as Wistron and other Apple partners including Hon Hai Precision, Inventec and Pegatron could reshape tech supply chains.

Taipei-listed Wistron is targeting India – where it is already making some iPhones – along with Vietnam and Mexico, setting aside US$1 billion (S$1.35 billion) to fund the expansion this year and next. “We understand from a lot of messages from our customers that they believe this is something we have to do,” chairman Simon Lin said on an earnings call. “They’re happy and appreciate that we can continue to make such a move and they will continue to work with us.”

Pegatron, which assembles iPhones, is also diversifying its manufacturing sites, including by adding capacity back home in Taiwan. Chief executive officer Liao Syh-jang said last Thursday that it hopes to kick-start manufacturing operations in Vietnam next year, after setting up a new plant in Indonesia last year, and it is further looking at India as a location for new facilities.

The firm said last Friday that it had agreed to purchase land and a plant in northern Taiwan.

Inventec, Apple’s main assembly partner for AirPods, said last Tuesday that it is preparing to establish a unit in Vietnam.

More than any other assembler, Hon Hai encapsulated how the coronavirus brought China, the world’s No. 2 economy, to a standstill. Better known as Foxconn, it signals a potential shift in a global production paradigm that has governed the electronics industry for well over three decades.

The company also has facilities in India, where it began churning out iPhones last year, and Vietnam. “Trade, the virus, all these things will make the world very different in the next decade,” Mr Alex Yang, the firm’s investor relations chief, said in a recent call.

But it is unlikely that China will fully give up its place as the world’s electronics workshop any time soon. This is because it is difficult to replicate the intricate network of suppliers, competent workers, efficient distribution systems and large home market that the country offers. Large-scale relocation of manufacturing capabilities would also take time.

Apple chief executive Tim Cook said late last month that the company was not looking to make any quick moves out of China in the light of virus-related supply-chain interruptions. “We’re talking about adjusting some knobs, not some sort of wholesale, fundamental change,” he said.

Still, the outward-bound trend is accelerating, especially among smaller-scale manufacturers. That extends to gadget-makers serving customers other than Apple.

Meiloon Industrial, which makes speakers and counts Harman International and Xiaomi among its clients, is seeking alternatives to China-based production and speeding up a move of capacity to places like Taiwan and Indonesia, said spokesman Eva Kuo.

The singularly trying experience of dealing with the outbreak in China will reverberate well after Covid-19 subsides, raising questions about the globalised business model of modern corporations.

“It’s a wake-up call,” Mr Joerg Wuttke, president of the European Union Chamber of Commerce in China, said last month. “China was a given, it was the perfect infrastructure for us to source and buy from there, and to sell. Now, of course, we have to reconsider scenarios, how to deal with China in the future.”

BLOOMBERG

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UPDATE 1-South Africa announces tax relief for business hit by coronavirus

(Adds details, background)

JOHANNESBURG, March 29 (Reuters) – South Africa’s National Treasury said on Sunday it was introducing a new tax subsidy of 500 rand ($28) per month for each worker to employers for the next four months to cushion financial losses suffered by firms due to the coronavirus.

In a statement, the treasury said it would also permit businesses with revenue of 50 million rand or less to delay paying 20% of their employees’ tax liabilities over the next four months.

“The tax adjustments are made in light of the National State of Disaster and due to the significant and potentially lasting negative impacts on the economy from the spreading of the COVID-19 virus,” the treasury said in a statement.

South Africa entered a 21-day lockdown on Friday with people restricted to their homes and most businesses shuttered. The country has reported over 1,180 cases of coronavirus and now faces a near certain deep recession.

The announcement also follows Friday’s decision by Moody’s to cut the country’s debt to subinvestment, meaning all three of the top ratings firms now rank the country at junk.

Earlier, Finance Minister Tito Mboweni told the Sunday Times newspaper South Africa would consider approaching the International Monetary Fund and World Bank for funding to fight the coronavirus. ($1 = 17.6250 rand) (Reporting by Mfuneko Toyana; Editing by Louise Heavens and Giles Elgood)

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China's $43 trillion market promise beckons global wealth firms

HONG KONG (BLOOMBERG) – China’s trillion dollar asset-management market opens wider this week, forcing BlackRock, Vanguard Group and other global firms to make a strategic decision: Go it alone or work with an entrenched local partner.

While the further liberalisation of the investment banking and money management industries in China has been overshadowed by the coronavirus crisis, wealth firms are nonetheless laying out plans to tap a market poised to reach US$30 trillion (S$42.8 trillion) in assets by 2023, according to consultant Oliver Wyman.

Starting April 1, they can apply for licenses to set up wholly-owned mutual fund management firms for the first time.

Vanguard and BlackRock are among firms going that route, people familiar have said.

Other options include boosting ownership of existing joint venture partnerships to 100 per cent, as JPMorgan Chase & Co. plans to do, people familiar have said.

“With so many license options and changing policies, one of the biggest questions all foreign players face is where to allocate their resources,” said Jasper Yip, a principal in the financial services practice at Oliver Wyman in Hong Kong.

“Asset management could be one of the most competitive sectors because of the opportunities.”

Here are the different paths asset managers can pursue in China and how some of them plan to proceed:

WEALTH MANAGEMENT SUBSIDIARIES

The China Banking and Insurance Regulatory Commission has been encouraging foreign asset managers to work with the wealth management subsidiaries of Chinese banks or insurers.

Global players are expected to bring to the table product design expertise, while the Chinese firms provide a vast distribution network and relationship managers.

BlackRock is in talks with China Construction Bank to set up a joint venture for a wealth management subsidiary, according to people familiar with the matter.

Goldman Sachs Group has discussed a similar structure, people familiar have said.

“Chinese banks have great distribution channels and client relationships, but many of them lack expertise to create long-term investment products with sufficient risk controls, so they would benefit from working with foreign players,” said Harry Qin, a partner at PricewaterhouseCoopers LLP in Beijing.

WHOLLY-OWNED COMPANIES

This is the go-it-alone option.

China is planning to allow applications for foreign-owned fund management licenses that would grant control of mutual funds.

At least six firms, including BlackRock and Vanguard, have told regulators they intend to apply to the Chinese securities watchdog, people familiar with the matter have said.

China regulators are trying to shift consumers away from shadow banking products underpinned by loans sitting outside banks’ balance sheets.

That’s creating an opportunity for mutual funds that are expected to increase assets by more than 10 per cent annually, according to Oliver Wyman, a unit of New York-based Marsh & McLennan Cos.

The fund management licenses will allow global asset managers to sell mutual funds to individual investors.

Some firms already hold private asset management licenses that let them target institutional investors and high-net-worth individuals, much like hedge funds.

“Wholly-owned fund management licenses will be one of the most sought after options for foreign companies,” said Rachel Wang, director of manager research for China at Morningstar.

“It allows them to offer more products and have a wide outreach to different types or sizes of customers.”

The potential is significant.

Even with the market opening, foreign players are expected to only account for 6 per cent of revenue generated in the asset management space by 2023, according to Oliver Wyman. Still, that small piece of the market could be worth US$8 billion.

“Chinese regulators are very eager to attract foreign players in the financial sector,” said James Chang, China consulting leader at PricewaterhouseCoopers.

“The government thinks the market is big enough for the local players to handle the competition.”

JOINT VENTURES

This is the legacy option.

Several investment banks already have mutual fund joint ventures in China. With foreign companies now free to control operations on the ground, it’s unclear whether partnerships still provide value.

“Many of the joint venture asset management firms that foreign players set up with their Chinese counterparts have not been performing as expected, partly due to limited product offerings and less than ideal collaboration with the Chinese brokerages,” said Qin from PwC.

The solution for some is to buy out their partners.

JPMorgan is seeking 100 per cent ownership of its fund management joint venture, people familiar have said.

The New York-based bank is in talks with Shanghai International Trust to acquire its stake in China International Fund Management, which oversees 150 billion yuan (S$30 billion).

Vanguard meanwhile has a robo-advisory joint venture with Jack Ma’s Ant Financial Services Group that started providing mutual-fund recommendations to Alipay app users in late March.

PRIVATE FUNDS

A go-slow approach.

Foreign companies were first allowed to apply for private fund licenses in 2016. Some 25 firms, ranging from banks to hedge funds and insurance companies, have won these licenses, according to Natasha Xie, a Shanghai-based partner at the JunHe law firm.

The private funds run three types of assets: stocks, private equity and pilot programs introduced by the Shanghai and Shenzhen governments that allow global asset managers to raise yuan-denominated funds from qualified clients to invest overseas.

“It would make sense for players who can’t commit significant investment or headcount to apply for the private fund management license,” said Xie.

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CORRECTED-UPDATE 1-Mexico will see below average growth in aftermath of coronavirus-S&P

(Corrects to clarify that Mexico will see below-average growth in Latin America, not to take the longest to recover)

MEXICO CITY, March 27 (Reuters) – Mexico will join Brazil as one of the countries in Latin America that will likely see below average growth in the aftermath of the coronavirus pandemic, S&P Global Ratings said on Friday, a day after it cut the ratings of Mexico and national oil company Petroleos Mexicanos.

The ratings agency is the second in the past week to highlight Latin America’s second-largest economy as being vulnerable after Fitch Ratings said Pemex would be the national oil company hit hardest among regional peers.

Lisa Schineller, lead analyst for S&P’s sovereign ratings in Latin America, said that the government of President Andres Manuel Lopez Obrador had signaled strong support for the troubled oil company.

“The government will provide extraordinary support for Pemex – with almost complete certainty,” Schineller said, adding that the ratings agency would continue to tie the Pemex rating to that of the sovereign.

Both are rated BBB since the cut from BBB+ on Thursday. (Reporting by Stefanie Eschenbacher and Abraham Gonzalez)

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S'pore working with 6 nations to ensure supply of essential goods

Singapore is working closely with six other nations to tackle disruptions to trade and supply chains that could impede the delivery of vital goods, including food and medicine.

Singapore and its partners in the initiative – Australia, Canada, Chile, New Zealand, Myanmar and Brunei – pledged that they will ensure trade lines for land, air and sea freight remain open.

They are also open to cooperation from other nations, said Singapore’s Trade and Industry Minister Chan Chun Sing in a Facebook post yesterday.

The initiative comes amid signs that the US$20 trillion (S$29 trillion) global trade sector is grinding to a halt in the wake of lockdowns, travel curbs, port quarantines and border controls imposed to contain the spread of the Covid-19 disease.

“We recognise that it is in our mutual interest to ensure that trade lines remain open,” the countries said in a joint statement issued by Singapore’s Ministry of Trade and Industry (MTI).

“We are committed to working with all like-minded countries to ensure that trade continues to flow unimpeded, and that critical infrastructure such as our air and seaports remains open to support the viability and integrity of supply chains globally.”

Though food is in plentiful supply across the world, logistical hurdles are making it harder to get products to where they are needed.

Four of the nations that inked the joint statement – Australia, Canada, New Zealand and Chile – are among the world’s top food exporters with shipments that include grains, pulses, meat, seafood and dairy.

While China’s extreme measures to stop the spread of the virus are now allowing its economy to slowly come back online, supply chains are disintegrating in other parts of the world and threatening the availability of essential products.

An MTI spokesman noted a sharp drop in airfreight capacity in the wake of flight cancellations and reduced connectivity.

Airfreight charges have correspondingly become volatile and have risen several times while some seaports have had restrictions imposed, including suspension of port operations.

There have also been disruptions to land transport because of enhanced border controls.

For instance, the production of medical equipment often involves supply chains that straddle multiple countries.

That means nations must ensure that components and raw materials can flow unimpeded and efficiently.

Mr Chan said: “Countries must band together and unite in this fight against the virus instead of making decisions that threaten global trade.

“As a country that prides itself on its openness and strong connectivity, Singapore is committed to bringing like-minded partners together to uphold trade and supply chain connectivity, and will continue to lead efforts in this area.”

Stockpiling and panic buying by consumers are also adding to supply strains.

Retailers from across the world have reported panic buying and hoarding of medications, putting at risk the supply of vital drugs to vulnerable patients.

In the United States, the stockpiling has prompted pharmaceutical boards in Idaho, Kentucky, Ohio, Nevada, Oklahoma, North Carolina and Texas to issue restrictions or guidelines on drug sales.

Food hoarding is also becoming commonplace.

Even some governments are moving to secure domestic food supplies.

For instance, Kazakhstan, one of the world’s biggest shippers of wheat flour, has banned exports of the product along with carrots, sugar and potatoes, among other products.

Serbia has stopped the flow of its sunflower oil and other goods, and Russia is leaving the door open to shipment bans.

Other nations are adding to their strategic food reserves.

China, the biggest rice grower and consumer, pledged to buy more than ever before from its domestic harvest, even though the government already holds massive stockpiles of rice and wheat, enough for one year of consumption.

“The decisions that are made today will have a lasting effect on the global economy when the situation stabilises,” said Mr Chan in his post.

“While the short-term challenges are real and severe, as responsible governments, we must continue to keep an eye on the future and what it will bring for our businesses and people after the virus has been defeated.”

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One fifth of American companies in China back to normal operations: Survey

BEIJING (REUTERS) – More than one fifth of American companies in China are back to normal operations after widespread disruptions caused by the coronavirus epidemic, a survey showed on Wednesday (March 25).

Nearly a quarter of the respondents to the survey by the American Chamber of Commerce in China said they expected a return to normal operations by the end of April, although another fifth expect delays throughout the summer.

“This is one of the areas that I think provides some sense of optimism,” the chamber’s president, Alan Beebe, said at a news conference accompanying the survey’s release.

The outbreak began in the central Chinese city of Wuhan late last year, causing massive disruptions to business operations, supply chains and economic activity. The outbreak has killed more than 3,200 people and infected more than 81,000 in China alone.

Half of the 119 respondents to the survey are experiencing revenue declines of over 10 per cent, and 14 per cent reported losing at least a half-million yuan (S$102,000) per day as a result of delays to re-opening businesses.

The survey also highlighted the reliance of American companies on China’s small and medium-sized businesses (SMEs), which have been slowest to get back to work and are most vulnerable to cash flow disruptions.

“Longer-term policy measures aren’t enough for the little guys,” said Greg Gilligan, the chamber’s chair, warning that some may not make it long enough to see government support.

Eight in ten respondents said SMEs contribute up to half of annual revenues, and over a tenth said that 75 per cent or more of their supply chain depends on SMEs.

The chamber is calling for its members to directly support their SME suppliers and customers, Beebe said.

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