February 10, 2020

The Coronavirus Threat To Supply Chains Is A Big Risk

Superbugs that resist treatment and spread rapidly like Coronavirus always catch the headlines. The market impact of most viruses tends to be intense, but it soon fades. However, this round is different, and investors could be underestimating the longer-term impact of this latest health emergency on global supply chains.

When SARS hit in November 2002, it wasn’t until the WHO issued an alert the following March that it garnered global attention. At that point, markets started to react: between March and June 2003, U.S. Treasury rates dropped 100 basis points and oil was down $10 on growth concerns.

10 Year Rates

10 Year Treasury rates during the 2003 SARS virus SLC MANAGEMENT

SP 500 Index

S&P 500 Index during the SARS virus in 2003 SLC MANAGEMENT

However, China was not as big of a market as it is today, and supply chains were rudimentary. That allowed investors to focus on solid U.S. fundamentals, and after a slight dip, equities moved higher. Eventually, as SARS cases peaked in June, U.S. Treasury rates started to rise.

The current Coronavirus is a more contagious version of SARS, but the global response this time is more coordinated. Markets have taken comfort that global awareness and resources will prevent a pandemic, and the rate of transmission outside China has been modest so far.

SARS Infections

Number of people infected by SARS over time SLC MANAGEMENT

Based on the playbook for SARS, as infected cases for Coronavirus start to level off over the next three months, we expect bearish global investor sentiment to turn. U.S. Treasury rates were down 35 basis points from the beginning of the year but have bounced back slightly. Equities, on the other hand, had given back their year-to-date gains but have recently hit new highs as earnings season remains strong.

Coronavirus Infected

Number of people infected by Coronavirus SLC MANAGEMENT

However, while the stock market may recover quickly, the disruption to supply chains could be more severe this time and last much longer. That will have deeper ramifications for the global economy, just as it was recovering from the U.S.-China trade spat. Currently, this risk is being underestimated by markets.

China’s Economy Will Take a Hit

Most economists expect China to take a 0.3-1.5% hit to its annual GDP from the impact of Coronavirus. Travel restrictions and the need to minimize contact will impact services. Manufacturing plants will see a productivity loss as infected workers, quarantines and transportation delays disrupt output. That means the expected economic rebound from the U.S.-China Phase I trade deal in Q1 2020 will be delayed.

The Chinese Lunar New Year, which is the largest annual migration in the world as families reunite, is typically a retail firestorm. But amid lockdowns, the virus smothered celebrations and consumer spending.

It should be evident in the next few weeks how effective the current preventative steps are in limiting the contagion. If the number of newly infected cases starts to slow, then lost output should be limited to the Hubei province at the virus’ epicenter. If efforts seem ineffective, there will be a material upward revision in both Chinese and global growth risk.

Supply Chains Are Under Stress

Beyond the immediate economic impact, however, it is disruption to global supply chains that poses the greatest threat to markets. The technology, electronics and auto sectors are the most vulnerable to impacts from Coronavirus.

The city of Wuhan in the Hubei province, where patient zero was diagnosed, is a manufacturing hub. Apple relies on Wuhan for some of its iPhone production, and it recently warned that the lockdown could impact its first-quarter earnings.

Meanwhile, global automakers such as Honda and Nissan have a significant slice of their Chinese production in the region. One of the largest auto parts makers in the world, Robert Bosch GmbH, shut two of its plants in the area. Hyundai just stalled its South Korean production as it ran out of Chinese parts. In a world of “just-in-time” inventories, a number of U.S. and European car manufacturers estimate they are three to four weeks away from running out of Chinese supplies.

None of this is a surprise. China is the largest exporter of intermediate products, so its ability to disrupt global output is significant. If Chinese factories stay offline for a couple of weeks, global automakers will be forced to dial back output targets.

Today’s sophisticated supply chains took a decade to optimize. Finding alternatives for high-end manufacturing is not trivial, and the assumptions on finding alternatives are probably optimistic. Even if the capabilities are there, any surge in demand will overwhelm these secondary suppliers.

Supply chain disruption is unequivocally being overlooked in most of the economic scenario analysis, as the knock-on effects are complicated.

China has to demonstrate it can quickly get its supply chains back online. Right now, markets are expecting flawless execution. That seems optimistic. There will undoubtedly be some mishaps and that will flow into earnings disappointments.

The U.S. auto industry, for example, sources 15% of its components from China. Any delays in a single part, shuts down the entire production line. Early alerts of these vulnerabilities are already cropping up. As noted already, Hyundai stalled its South Korean production and Fiat Chrysler just warned they may have to halt production at one of its European plants in the next few weeks if the dislocation continues. Expect this stress to intensify.

This article first appeared in Forbes. This material contains opinions of the author, but not necessarily those of Sun Life or its subsidiaries and/or affiliates.

About SLC Management

SLC Management is the brand name for the institutional asset management business of Sun Life Financial Inc. (“Sun Life”) under which Sun Life Capital Management (U.S.) LLC in the United States, and Sun Life Capital Management (Canada) Inc. in Canada operate.

Sun Life Capital Management (Canada) Inc. is a Canadian registered portfolio manager, investment fund manager, exempt market dealer and in Ontario, a commodity trading manager. Sun Life Capital Management (U.S.) LLC is registered with the U.S. Securities and Exchange Commission as an investment adviser and is also a Commodity Trading Advisor and Commodity Pool Operator registered with the Commodity Futures Trading Commission under the Commodity Exchange Act and Members of the National Futures Association.

BentallGreenOak, InfraRed Capital Partners (InfraRed) and Crescent Capital Group (Crescent), and Advisors Asset Management are also part of SLC Management.

BentallGreenOak is a global real estate investment management advisor and a provider of real estate services. In the U.S., real estate mandates are offered by BentallGreenOak (U.S.) Limited Partnership, who is registered with the SEC as an investment adviser, or Sun Life Institutional Distributors (U.S.) LLC, an SEC registered broker-dealer and a member of the Financial Industry Regulatory Authority (“FINRA”) . In Canada, real estate mandates are offered by BentallGreenOak (Canada) Limited Partnership, BGO Capital (Canada) Inc. or Sun Life Capital Management (Canada) Inc. BGO Capital (Canada) Inc. is a Canadian registered portfolio manager and exempt market dealer and is registered as an investment fund manager in British Columbia, Ontario and Quebec.

InfraRed Capital Partners is an international investment manager focused on infrastructure. Operating worldwide, InfraRed manages equity capital in multiple private and listed funds, primarily for institutional investors across the globe. InfraRed Capital Partners Ltd. is authorized and regulated in the UK by the Financial Conduct Authority.

Crescent Capital Group is a global alternative credit investment asset manager registered with the U.S. Securities and Exchange Commission as an investment adviser. Crescent provides private credit financing (including senior, unitranche and junior debt) to middle-market companies in the U.S. and Europe, and invests in high-yield bonds and broadly syndicated loans.

Securities will only be offered and sold in compliance with applicable securities laws.

AAM is an independent U.S. retail distribution firm that provides a range of solutions and products to financial advisors at wirehouses, registered investment advisors and independent broker-dealers.

Website content

The content of this website is intended for institutional investors only. It is not for retail use or distribution to individual investors. All investments involve risk including the possible loss of capital. All asset classes have associated risks. Certain asset classes are speculative, can include a high degree of risk and are suitable only for long-term investment. Further information available upon request. This website is for informational and educational purposes only. Past performance is not a guarantee of future results.

The information contained in this website is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained on this website. The assets under management (AUM) represent the combined AUM of Sun Life Capital Management (Canada) Inc., Sun Life Capital Management (U.S) LLC, BentallGreenOak, Crescent Capital Group, InfraRed Capital Partners, and Advisors Asset Management.

AUM as of March 31, 2025. Total firm AUM includes approximately $11B in cash, other, unfunded commitments, and Advisors Asset Management equity. Total firm AUM excludes $16 billion in assets under administration by AAM.

Currency conversion rate: USD $1.00 CAD $1.4387 as of March 31, 2025.

UK Tax Strategy - InfraRed (UK) Holdco 2020 Limited

InfraRed (UK) Holdco 2020 Ltd is the UK holding company of InfraRed Partners LLP and a subsidiary of Sun Life (U.S.) Holdco 2020 Inc, which has its headquarters in the U.S. The company was incorporated to purchase InfraRed Partners LLP and acts solely as a passive holding company. The Tax Strategy for the InfraRed Holdco Group sets out our approach to the management of InfraRed Holdco Group UK tax affairs in supporting business activities in the UK. 

This UK tax strategy is published in accordance with the requirements set out in Schedule 19 of Finance Act 2016. The strategy, which has been approved by the Board of Directors of InfraRed (UK) Holdco 2020 Ltd, is effective for the period ending 31 December 2024. It applies to InfraRed (UK) Holdco 2020 Ltd and its dormant subsidiary Sun Life (UK) Designated Member Ltd, referred to as the “InfraRed Holdco Group”. InfraRed Holdco Group.