Equities shrug off South Korea but should they?

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.

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.