Spending Won’t Solve This Crisis

Tuesday, 18 February 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • If the wheels come off

Is it just me, or has the cruise line industry ramped up its advertising spend?

I haven’t done any background research. But I do enjoy reading a real physical newspaper over breakfast. And most every day there’s another of those multi-page spreads spruiking the must-visit cruise destinations.

It can’t be easy enticing people onto your ship these days. Not when you’re competing with images and daily updates from the Diamond Princess splashed across global media.

That’s the vessel that’s been stuck in Yokohama, Japan for 14 days now. The ship was held in port when it came to light a passenger on the previous cruise fell ill. Which didn’t happen until almost a week after he disembarked in Hong Kong on 25 January.

On 4 February, 10 people on board tested positive for coronavirus. And no one was allowed to leave.

The plan was to quarantine the 3,700 passengers and crew long enough to ensure they hadn’t contracted the virus. A plan that hasn’t worked out so well for those trapped on board.

As of last night, Japan’s Health Ministry said 454 passengers have now tested positive for Covid-19. That’s the virus’s new label. Concerningly, 189 of those are carriers with no symptoms. Which makes identifying infected individuals a lot more complex.

Some 340 American citizens were taken off the ship and flown to the US mainland on Sunday. Tomorrow about 200 Aussies will disembark as well. They’ll take a chartered Qantas flight to begin a new quarantine period in the Northern Territory.

We wish them — and those who remain aboard the Diamond Princess — well.

The Diamond Princess may slip from front page news as the rest of the passengers are eventually allowed to leave. But the damage to the cruise line industry is likely just beginning.

Investors in Carnival Corp [NYSE:CCL] have already watched the share price of the US$28.8 billion company drop 17.0% year-to-date.

The US$23.6 billion Royal Caribbean Cruises Ltd [NYSE:RCL] hasn’t fared much better. Its share price is down 16.0% so far in 2020.

Then there’s Norwegian Cruise Line Holdings Ltd [NYSE:NCLH]. It’s down 10.8% in that same period.

And the US$5 billion Genting Hong Kong Ltd [HKG:0678] is down 24.7% this calendar year.

With price falls like this it can be tempting to go bargain hunting. But I’d suggest to avoid the temptation.

The coronavirus is still far from contained. And any vaccine is likely months or more away. Let alone enough supply to immunise millions if not billions of people.

I hope I’m wrong. But this looks like a slow motion train wreck in its first moments. One where the passengers in the first car have just noticed the grinding sound of a wheel coming off the tracks. And one that’s likely to cause far more damage before it comes to a rest.

If there’s any silver lining here, it may be for Australia’s hard-worked fireys.

As Traveller reports:

The world’s second-largest cruise line, Royal Caribbean, will offer free cruises to firefighters as it redeploys a giant ship to Australian waters.

Spectrum of the Seas, a billion-dollar cruise giant capable of carrying up to 5622 passengers, will come to Sydney after the coronavirus saw it unable to cruise Asian waters.

The ship, which was purpose-built for the Chinese cruise market, has reportedly lain idle since the coronavirus hit.

We hope they enjoy a safe, relaxing free voyage. They definitely deserve it.

More, after the markets…

Markets

Overnight, US markets were closed for the Presidents Day holiday.

In Europe the Euro Stoxx 50 index closed up 12.30 points, or 0.32%. Meanwhile, the FTSE 100 gained 0.33%, and Germany’s DAX closed up 39.68 points, or 0.29%.

In Asian markets Japan’s Nikkei 225 is down 363.09 points, or 1.54%. China’s CSI 300 is down 0.85%.

The S&P/ASX 200 is down 21.50 points, or 0.30%.

West Texas Intermediate crude oil is US$51.98 per barrel. Brent crude is US$57.67 per barrel.

Turning to gold, the yellow metal is trading for US$1,584.30 (AU$2,361.10) per troy ounce. Silver is US$17.81 (AU$26.54) per troy ounce.

One bitcoin is worth US$9,683.41.

The Aussie dollar is worth 67.10 US cents.

If the wheels come off…

It’s not just the cruise line industry struggling under the weight of the deadly new virus.

Travel and accommodation stocks are all likely to face increased pressure over the coming weeks. They may bounce on any optimistic news around a cure or diminishing infection rates. But they could fall hard if that optimism proves unfounded.

Australia’s education sector is also holding its breath to see if the travel ban on foreigners coming from China gets extended…again…to a fourth week. I have no inside sources here, but I expect it will be. Meaning some 100,000 Chinese students will remain barred from physically attending Aussie universities.

The retail sector is also starting to feel the sting. Coles reported delays in acquiring new refrigeration units out of China. As well as likely delays in newly planned food exports into China.

Major events across the world are also being cancelled or postponed. Japan, for example, just cut all 38,000 non-professional runners from the Tokyo Marathon.

But some of the biggest losses ahead could lie within the still booming tech sector.

From Bloomberg:

Apple Inc. doesn’t expect to meet its revenue guidance for the March quarter because of work slowdowns and lower smartphone demand, showing that the virus outbreak in China is taking a bigger-than-predicted toll on one of the world’s most valuable companies.

The problems and companies mentioned above are just the tip of the iceberg.

But markets, as we looked at last week, are still largely shrugging off the potential ramifications of a global pandemic. That’s mostly due to investors’ faith that the world’s central banks will pull enough levers to keep any pullback from becoming a rout.

JP Morgan and Moody’s are among the big names all but certain that the RBA will cut interest rates again heading into autumn.

Our view is that we will probably see another rate cut here, that certainly the impact to the Australian economy is going to be significant,’ says JPMorgan Asset Management’s head of fixed income Bob Michele. (Quoted from the AFR).

Then there’s Moody’s. The ratings agency believes the impact from the virus and China’s slowdown will lop 0.3% from Australia’s GDP. Moody’s adds (from The Age):

Our forecasts for improving growth assume that interest rate cuts from the Reserve Bank of Australia will help the housing recovery as well as business activity.’

Ah. Our good old housing market. The second most expensive in the world. What would we do without it?

But Aussie investors aren’t the only ones who can anticipate more cheap money ahead.

As Bloomberg reports:

China on Monday offered more funding to banks and cut the interest rate it charges for the money. Singapore has also promised a “strong” package of budget measures and central banks in the Philippines, Thailand and Malaysia have cut interest rates as Asian economies grapple with the virus-induced slowdown.

The world’s central banks are doing their best to get ahead of what could be a huge hit to the global economy. And for now investors are appeased.

If China’s extraordinary efforts to contain the coronavirus prove effective — and the rest of the world manages to hold it at bay — until a vaccine is widely available, lower interest rates and additional quantitative easing (QE) may be enough to keep the party going.

But that’s not what the passengers in the first car of this slow motion train wreck will tell you.

Cheers,
Bernd