Asian equities tumbled on Monday, and you can say some semblance of sanity has returned to the markets. A spurt of fresh coronavirus cases in Beijing, coupled with rising infection rates in many Asian nations, have reminded us that the Covid-19 crisis is far from over.
The rally in Asian stocks since late March makes little to no sense from an economic or business standpoint. Yes, lockdowns have prevented an exponential rise in cases in many locations around the world. As lockdowns end, though, new waves of infection are highly likely.
What's more, let's not forget that developed economies are in deep recession and are experiencing huge surges in unemployment. It takes a long time for jobs to come back. Jobless people, if they've got any sense, don't spend.
So revenue and profits at the vast majority of listed companies are going to suffer severe pain at least well into next year. If these second-wave infections take off, the recovery only gets pushed further back, with health fears feeding directly into poor corporate performance.
Nomura has been coming to much the same conclusions with Japanese stocks. Its Japan macro and economics team warns in a new report that recent gains cannot last.
"Japanese equities have rebounded sharply," with the Topix up 31.9% from March 26 to June 8. "However, we do not expect Japanese equities to keep on rising for long. The main reason for this view is that the economy and corporate earnings are at a very low ebb."
Nomura's reticence is borne out here on Monday. Japan's Topix index of the broad market in Tokyo fell 2.5% for the day, leaving it down 6.1% from its post-March high a week ago.
Nomura's quants say current equity valuations appear to price in earnings for fiscal 2021, which runs into March 2022, at least six months early. The truth is, we simply don't know how those corporate earnings will pan out, so pricing in an optimistic forecast in is extremely risky.
If June quarter earnings are poor, the quants expect to see a correction. "Investors are currently focusing on the positives of an end to staying at home and the resumption of economic activity, but at some point markets might start to realize that economic activity is unlikely to return to pre-Covid levels," Nomura's team concludes.
I'm at heart an optimist. We can move beyond the coronavirus -- in the end. But I also envision a very complicated emergence from lockdown and international travel bans. It is going to take a very long time for life to get into the much-vaunted new normal.
What shape will that take? Nomura notes that intangible expenses are likely to rise as companies look to avoid the "Three Cs" of closed spaces, crowded spaces and close-contact settings. Factories, stores and offices are going to need to spend money to revamp their physical premises, and once they do they are going to require more space to do the same old thing. That's less efficient. It implies lower operating profits per employee.
Nomura is watching for companies that have the ability to counteract these trends through automation and labor-saving initiatives. But it cautions that the high valuations in Japan, driven up by retail investors and entities such as the Bank of Japan that pay no attention to fundamentals, are supporting markets at unreasonable levels.
There's an immediate concern here in Asia that China is witnessing a fresh Covid-19 outbreak. China reported 57 new confirmed infections on Sunday, with 36 of the cases in Beijing. The Chinese capital has now reported 79 cases in the last four days.
An official said containment effort has rapidly entered "war-time mode." The capital's largest fruit-and-vegetable market, Xinfadi, is the epicenter, with 53 people testing positive in recent days. The authorities have shuttered Asia's largest food market, which is 20 times the size of the seafood market in Wuhan where this all began, and locked down 11 nearby residential communities. Beijing has also tightened traffic controls into and out of the city, and other cities are advising against travel to the capital.
My wife jokes that 79 new cases in Beijing means at least 790 cases. Quite honestly, who knows how reliable those numbers are? But we can safely say that China's fight against Covid-19 is far from over, and the capital is wrestling with a familiar situation in the form of a wet-market explosion of infection.
Chinese officials are suggesting that the Beijing outbreak has been imported. The DNA sequence suggests it may have come from Europe, and authorities are investigating chopping boards used to slice imported salmon. That would be great PR and would muddy the waters further about where the virus originated.
China's CSI 300 index ended down 1.2% on Monday, faring better than other Asian markets. That often has been the case, and markets in Shanghai and Shenzhen are down only 3.5% year to date. There's certainly been state support of financial markets in China, but they have also seen less of a selloff because investors in the mainland have few other places to park their money.
Industrial production in China rose 4.4% in May, figures released on Monday show. That's the second straight month of a rebound in factory activity. But the National Bureau of Statistics warned of "quite a few difficulties and uncertainties," and the figure was less than the 5.0% advance expected by a Reuters poll of analysts. April was the first month to turn positive, with a 3.9% gain.
In a sign of how China's propaganda machine is trying to twist the Covid-19 narrative, official news service Xinhua's stock report here on Monday neglected to mention the outbreak in the Chinese capital, but said Japanese stocks were down due to concerns of a resurgence of cases in Tokyo.
The Japanese capital reported 47 new cases on Sunday, with 32 of those connected to nightclubs. It's the highest one-day case count since May 5, although the city government says part of the explanation comes from very active testing.
The Hang Seng in Hong Kong was down 2.2% in Monday trade, with Aussie shares down 2.2% and Singapore off 2.6%. Hefty falls, all.
The sharpest selloff is in South Korea, where the Kospi 200 has plunged 4.9% on Monday. Not only is Korea one of the most export-exposed economies in Asia, but the Korean market has been on a runaway tear, up 46.5% from March 19 through its June 10 peak. It has since corrected 8.2%.
I expect to see further corrections in Asia as corporate earnings come through. Asian equities will perform even worse if the Covid-19 spread continues. But business is bad enough as it is right now.