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The Bottoming Of China's Economy

Bill Ehrman profile picture
Bill Ehrman


  • We continue to ask ourselves if the long-term growth rate of the world economies, including China, will be impacted by the coronavirus.
  • Will the long-term growth rates of most companies be impacted by the coronavirus?
  • Will global consumers shift their long-term patterns of consumption/spending/traveling? Our answer remains no but we expect the return to normalcy to take time.
  • The first country hit by the coronavirus, China, already appears to have bottomed out economically.

Stock markets declined while bond yields fell the most last week since the financial crisis as fears that the global economy would be severely hurt, maybe even enter a recession, rose as the outbreak of the coronavirus spread across countries other than China, impacting consumers and businesses alike. The flight to safety in bonds pushing rates down to record low levels kicked off programmed trading/selling across the board in all stocks which was not limited by an uptick rule.

Selling was indiscriminate without exception, but for a small number of companies perceived as beneficiaries of the virus: Clorox (CLX), Netflix (NFLX), MMM, and a few drug companies working on a cure for the virus. Economists lowered their GNP estimates which was expected, and Goldman Sachs said that S&P profits would be flat for the year. However, if you look at their forecasts, even Goldman's, virtually all of the declines would take place in the first half of the year followed by improvements sequentially in the second half of 2020 into 2021.

We continue to ask ourselves if the long-term growth rate of the world economies, including China, will be impacted by the coronavirus. Will the long-term growth rates of most companies be impacted by the coronavirus? And finally, will global consumers shift their long-term patterns of consumption/spending/traveling? Our answer remains no but we expect the return to normalcy to take time. There will be winners and losers along the way creating opportunities to profit from these shifts in mindsets and patterns.

In fact, the first country hit by the coronavirus, China, already appears to have bottomed out economically. China's economy contracted at the fastest pace on record in February with the Purchasing Managers' Index falling to a record low of 35.7 but we now hear from Apple (AAPL), Starbucks (

This article was written by

Bill Ehrman profile picture
Managing partner of Paix et Prosperite LLC, educator, mentor and consultant.  Former Senior partner and CIO at EGS Partners, Soros Fund Mgt and Century Capital Associates. Experience over 50 years  successfully managing money, investment banking, consulting and mentoring. He incorporates a top down global economic, financial and political view with bottoms up independent research industry by industry and company by company.

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Comments (78)

jprizzuto profile picture
not only has the outbreak peaked and rates of infection been slowing down in china, but it is also very likely that coronavirus will not spread as broadly in other countries as it has in china. i.e. the virus impact in china will likely be the worst case for the world.

some of the more important issues regarding the spread of a contagious respiratory disease is population density, access to health care and containment. this is obvious, right?

the cornavirus erupted in eastern china. clearly among the most densely populated regions of the world. it appears that the rate of contagion has already slowed down in china. sure we are suspicious of the numbers but if we assume close enough, then the disease in china has gone from unknown to peaking in about 3 months.

considering the 'surprise' outbreak, large geographic region, high population density, and inadequate health care, china has done a pretty good job at containment and ramping medical services. further, they are already slowly returning to work.

the spread to other parts of the world will likely be much less harmful because it is no longer a surprise, we have been preparing for weeks, places like europe and north america have much lower population densities, the health care community and funding has already been ramping, and travel restrictions are already prevalent. also a good guess that there will soon be a vaccine. buy gild (i did).

from a human tragedy pov, it looks like the worst has past in china and the worst will be a lot less so in the other breakouts of the world.

from an economic pov, fear and greed will capitalize as much as possible and then settle back to normal in a few months.
maudie profile picture
South Korea corona cases “over 4000”. Deaths 22. In line with influenza.
The WHO said today in their report that the rate is 3.4%, more than 30 times worse than the flu. I trust the WHO more than I trust someone browsing.
Shaduc profile picture
- hubei province where they were figuring out medical treatment & ... WHO has been one or 2 weeks late in their announcements.

Lacks credibility. Of course I have the time to follow the reporters & decipher reports!
financialgrant profile picture
one thing to consider is that the corona virus long term impact is still unclear compared with the impact of the flu. Yes the flu is worse so far, but maybe the corona virus will become a pandemic and if it kills 2-3% of the entire population of the world would end up killing hundreds of millions of people. Maybe this is the worse case scenario, but i think it is still too early to tell. Another way of looking at this is even if it doesn't become that bad it might just be the straw that breaks the back of the camel of a world economy or the black swan event that becomes the catalyst for economic downturn i.e. recession or depression. The minimalist view might be correct and we can hope this is true but i think completely disallowing the possibility of the more serious outcome is a bit pollyanneish in my perspective.
praveenbhargava profile picture
Corona Virus is a drag on the world Economy and China is the leader of it.Never Assume, Think or Seen in the last 40 years like that, That a city WOHAN,CHINA is blocked for the last 2 months or so having a population of 1.10 Crore. It is done only in acute emergency with no other rescue operation is available. Corona Virus has gradually spread in around 60 nations with stoppage of air, sea and road ways across the world. All Manufacturing, Transporting and Distributing activities are stayed for a long time across the Asia and other parts of the world.
All these above happenings will last for the next 3-6 months or more depending on the finding of its cure by the medical world. Till than every economic activity will stay back or may be carry on with very little progress.
In these conditions it is very difficult to improve economy in a short time with all the things become stand still.
My assessment is that recession (ACUTE RECESSION) will last for more than 1 year and may show signs of gradual improvement not before July 2021 and may fully recover by the end of 2021 only if perfect cure of Corona Virus will be find by that time.
Praveen Bhargava
Bremyer profile picture
Properly modulated, careful and thoughtful. Thanks.
Thanks for the great article. I'm also betting China will recover quickly throughout 2020.
Just wondering, though, why would you raise cash by SELLING positions with higher exposure to China, when you expect China to RECOVER so quickly? Were those just companies that you had OTHER reservations about?
Thanks, again.
Bill Ehrman profile picture
I did not realize that the coronavirus growth would slow this quickly...I sold 12 says agp
Ben Gee profile picture
We will see whether China will recover from the Coronavirus or not in the next month or 2, if not, be prepare for a very rough ride.
The bottoming of the Chinese ecconomy spells disaster for Tesla. The Chinese have been subsidizing the Tesla Shanhai Plant. Without that subsidy, the plant, and Tesla's business plan to sell cheap Tesla's all over the world goes up in smoke. It was good ole Elon the genius who put them in that situation. I would not like to be placed in a Chinese vise in which I had to get my begging bowl and go to China just to keep my business alive.
Bill Ehrman profile picture
Tesla will get their exemption
Ben Gee profile picture
China would like to see Tesla succeed.
daskapital1000 profile picture

Bingo! That is the key takeaway after the last week sell off. By default I'm ignoring macroeconomic forecasts and prognoses. Of course, I don't know how long this coronavirus situation will last (nobody does), but it offers an excellent buying opportunity. I call it a "target rich environment".

Thank you @Bill Ehrman for an excellent article. You got yourself another follower.
daskapital1000 profile picture
The key takeaway of the article and last week sell off:

"We find the stock market tremendously undervalued today for the true investor with more than a six-month time horizon."
Really appreciate your articulate article. I point out that you practice too much caution and thus ignore the 'long tail' scenarios Your scenario is a 'most likely' one, sans quantified math models.

SA: what is the 'worst case scenario'? You bet the US news media outlets have surfaced THAT in the last two days.

Keep at least three years' budgeted money in cash-like liquid assets. THEN, your investments will be left to regrow after the bottoming... in Bill's or any other scenario. THERE is the end of this pandemic. E.g., in three months, six months, two years, three years maximum. Normalcy resumes.

The experts are analyzing historical viral epidemics. The Spanish flu is the most studied and is similar to COVID19. Takeaways for civilians: COVID19 does remain forever more; COVID19 could re emerge like the Spanish flu much worse next Winter; like Wall Street Quants modeling emergent market behavior, epidemiologists modeling transmission are stone silent. My civilian concern is Earth stands on a knife's edge as COVID19 patients are NOT tested, '95 masks are NOT available to first responders and carers, Trump and Democrats blame each other, vital time is lost rather than preparing for disruptions in normal every day patterns. I mean drills, folks!

SA: most any COVID19 scenario is possible. Full stop. Politicians are the ones driving civilization to the edge pandemic scenarios by their conscious and very public actions. Which is the worse disease?

I expect you saw Chinese guards at chokepoints measuring citizens' forehead temperature. I expect you saw stacks of corpses, bagged and tagged, too. I expect you saw active sterilization methods in every country suffering a major outbreak globally. I expect you witnessed President Trump's leadership style with his brain trust on the news daily. Thank god Trump is safe?
Bill, thanks as always for your voice of calm and reason on SA after a volatile, "sky is falling" week in the equity markets.

With cash availability hampered in the near term among Chinese and perhaps some US/EU companies with Chinese supply chain exposure, to what degree do you foresee either of the following occurring over the next couple of months:

- A real or stealth devaluation of the yuan in combination with the massive liquidity provided to the Chinese banking sector and SMBs.
- Despite the lower equity values, reduction of share buybacks and dividends among exposed US/EU companies.
If this is an irrational scare and market participants have it all wrong, then we are truly moving into an excellent buying environment right now or in the near future. Because of where we are in the business cycle, and despite phenomenally low and stimulative interest rates, I think that approach warrants caution.
Shaduc profile picture
" irrational scare and market participants have it all wrong"

U try living in Greater China, or on some Princess boat.
Read the comment - “I think that approach warrants caution.”.
100,000 cases now. Soon 1,000,000, then 10,000,000, then 100,000,000 etc. A death rate of 2-3% and severe cases at 20-25%. Now it shows up in Africa. The fear is only beginning.
Bill Ehrman profile picture
Not close....nor factual....but invest on your own view
stock realist profile picture
The rate of spread will be slowing fast as prevention awareness ramps up, so many public events get cancelled and people otherwise stay home on their own, and fly less, etc.

And i really don't think you'll see a death rate above 2%. And they are saying that so far 80% of people getting it get only a "mild" case of it.
Much closer to reality than your take. Do you not understand exponential growth? This is a virus that the human race has no immunity to, so we are all vulnerable.
A few weeks ago, everything pointed to a meaningful pullback but the market kept rising. People became complacent and thought the coronavirus was not a big deal. At the time (2/9) I said something like "I maintain the worst is yet to come, the coronavirus is very unlikely to be contained and very likely to spread to the whole world."
Now we are indeed having a meaningful pullback, what to do now? It's OK to be a long-term investor. The problem is, how many long-term investors really know where their stop is and if they can really take the pain?
Bill, I couldn’t agree more. Thanks for your comments as always. I totally get the economic disruption but the hysteria is just that. Panic is never a good way to react when investing and this too will pass. Nibble away at companies you wished you’d owned or owned more of before all this and in due time you’ll be rewarded. As Buffet said once, “the market is an effective means of taking money away from the impatient and giving it to the patient.”
01 Mar. 2020
What is your view of Evergrande Group 25% discount on their apartments?
Bill Ehrman profile picture
no advise,,,,,,noit my role on indiviual stocks...my clients get that

good luck
richjoy403 profile picture
Bill -- Thanks for the well-developed and reasonable analysis.

I've long recognized your name, and am now a follower.
wilfredian profile picture
"Program trading takes no prisoners and needs to be restricted by the imposition of the uptick rule." No, let's leave it unregulated. Program trading, like the indiscriminate selling caused by ETFs, is creating market inefficiencies. The current era of the stock market will prove to be a stock picker's paradise.

Perfectly good companies, with zero exposure to China or in heavily defensive industries have been selling off, giving some great bargains. I bought EPD, MO, FB, SQ, VRTX, BMY on Friday morning, all at unreasonably low prices. Why should any of these companies have been at such bargains?

I hope the carnage continues, so I can pick up some more over the next few weeks. If we go into a bear market I will even starting selling some of my beloved TLT, which I had been buying on margin as the stock market rose (when all pundits were saying to sell), and which has been serving me well.
Bill Ehrman profile picture
not pragmatic
Angelo_A profile picture
well written... from Portugal, Europe, here.
not one case yet , but a good amount of hysteria.
Reduced my stock position by 15% from 77% to 62%, increased global interm. treasure from 13% to 20% and have been and will be hoarding cash and wait to see the global logistics reignite, first trimester Chinese industrial results and global companies first trimester results and guidance for 2020.
will start pulling triggers when I see better valuations , not there yet. Some sectors are still way, way, overvalued.

kind regards
Hi Bill: Thank you for updated views. Market may be at 18X earnings based on 'prior' earnings forecasts; but many companies and analysts are downgrading the earnings outlook for large multinationals. Possible the P/E multiple will be much higher when the earnings downshift is fully reflected? I think the earnings estimate revisions do NOT move at the same speed that the ALGO BOTS move the markets - so some LAG may be required before the situation is 'normalized'.
What do you look for to identify that the short term BOTTOM has been established? Time to LOAD UP again? What's the signal? Thanks
I brought stocks last week and will continue to average into them next week if the market falls. As Buffet says, "buy great stocks when they are on sale." Everything will be fine in a few weeks....
Ben Gee profile picture
Everything will be fine in a few weeks, if not, prepare for a very rough ride.
Good article. Watch for the consolidation in certain interest rates. I purchased a ton of cruise line stocks and certain tech and certain banks on Thursday and Friday. Gifts. When certain interest rates do consolidate, I will be very long equities.
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