Covid-19: Liars by omission

Large European corporates are not fair with their shareholders. But for Pernod, which provided (13 February) a degree of granular sensitivity to the coronavirus impact on business, all large corporates have dodged the issue of the virus. This is not how corporate communication is supposed to work. It took Apple’s recognition (on 17 February) that there was indeed a supply chain issue for equity investors to wake up as they have been basking in the illusion that the Chinese problem was a short-term one and a Chinese one contained in Wuhan.

Over the last 15 days, there has been a continuous flow of anecdotal evidence that business could not remain as usual way beyond a Q1 effect. That spanned LNG tankers stuck at sea, Alibaba packages missing, migrant workers staying in their villages, shortages here and there including feed for chicken with implied impacts on food prices. Clients will not be seen in car showrooms nor buying a house or a Vuitton bag. The first two industries are presumably in deep trouble, not to mention suppliers to these industries.

The absolute shame is that the domino effect of the Chinese health crisis was for all to see and guess from late January. Three weeks later, the silence about mitigation measures is astounding. There is a lingering suspicion that the largest European corporates with a large exposure to China are keen not to offend authorities by making public their operational issue. This would not fit with the narrative that the Chinese government is in control.

Management boards are paid to find the right balance between respecting their shareholders, i.e. informing them, and finding ways to avoid that this information becomes a liability. No news on that front. The issue is that Western corporates' ambivalence about doing business in a dictatorship is bursting at the seams when that dictatorship is too big (20% of world GDP) to handle.

As the bad news will come thick and fast, from disruptions in supply chains to Uighur-related issues, it would be extremely wise to start getting genuinely transparent. There is no point brandishing the ESG flag all over the headquarters to get caught with one’s pants down with the mundane matter of lying about the way business is faring in China.

Pretty much all of the coverage of AlphaValue is suffering from this obscure virus. At the margins, Financials (except for HSBC and StanChart) are mechanically less exposed. Lucky them.

We can isolate 95 European issuers with sales in Asia tagged at 5% or more. As those sales are presumably partly derived from China, it is telling that only 51 out of the 95 are giving a measure of that Chinese exposure.

Below is an unorthodox plot chart combining market caps and exposure to Asia from the universe of the 95 European issuers. Again, it is only as good as the information provided in annual reports.