Equities shrug off South Korea but should they?

Equities 3 minutes to read

Peter Garnry

Head of Equity Strategy

Summary:  Data suggest COVID-19 is beginning to impact Beijing as well and South Korea saw a one-day 50% jump in infections triggering a sell-off in South Korean equities. Global equities are a bit more calm but should they be that? The risk is increasing that we could see a severe supply chain disruption and semiconductors could be the epicenter following the car industry's troubles. We recommend investors to be tactically negative on semiconductors on expected Q1 earnings miss.


Risk-off in equities came to live in yesterday’s session sparked by news that Beijing was now experiencing a surge in infections and traffic congestion data suggesting more people in Beijing was staying at home. News got worse overnight with South Korea announcing a 50% jump in new COVID-19 cases in addition to a ‘special management zone’ to contain the outbreak. The reaction in the leading equity index in South Korea KOSPI 200 was a big gap down with an attempt to come back failing closing lower extending KOSPI 200’s drawdown length to 27 months. South Korea is generally a good country to watch for many macro reasons and now the COVID-19 outbreak in the country makes it even better.

Source: Bloomberg

The bigger risk contagion effect that the equity market doesn’t seem to be pricing in is the potential for COVID-19 to spread to other Asian countries on a larger scale. If that happens it will cause severe global supply disruptions. South Korea is famous for its footprint in the semiconductor industry and the MSCI World Semiconductor Index 1.5% from its all-time highs. Tactically being short semiconductors is a good risk-reward candidate playing on Q1 earnings miss on global supply chain disruptions.

Source: Bloomberg

The Philly Fed Business Outlook Survey jumped to 36.7 in February some of the highest level in many decades following the jump in January. There’s a saying that one observation is a change and two is trend, so something is going on and our hypothesis is that some US firms are beginning to source some manufacturing temporarily in the US to offset the lack of production capacity in China. Even if they source US manufactured goods at higher prices eating into gross margins they have to do it in order not to deplete inventories and then suddenly seeing revenue drop dramatically. Yesterday’s session saw a little bit of this connection with US steel producers such as Nucor and U.S. Steel being bid. We recommend investors to scan for US manufacturing companies as they could get a boost in Q1 from the COVID-19 outbreak in China.

Source: Bloomberg
Source: Saxo Group
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.