Delta Variant Poses Risk to Asian Supply Chains. That Could Be Bad For Global Markets.


Migrant workers in Malaysia. The Delta variant is affecting global supply chains in Vietnam, Malaysia and Thailand.

The Delta variant of Covid-19 is creating a frightening déjà vu in many countries that are the crucial to global supply chains like Vietnam, South Korea, Malaysia and Thailand, posing another risk to global markets.

These countries have been a beneficiary in recent years as U.S. companies looked to diversify their supply chains away from China. But now that diversification could bring its own risks.

The high number of Delta variant infections is forcing governments to take drastic measures to try to limit disruption, according to TS Lombard's Jon Harrison and Krzysztof Halladin. Factory workers who test positive in Thailand, for example, are quarantined with the entire staff for 28 days to keep production going, and in Vietnam factories are housing workers and mandate teams change over every two weeks.

However, many factories are being shut or running at undercapacity, and the region is grappling with labor shortages as infections and hospitalizations rise, the duo writes. The industries affected are varied: In Thailand, TS Lombard analysts write, autos have been disrupted as Covid closures create a ripple effect and close otherwise unaffected parts of complex supply chains. In some areas in Vietnam, as many as 90% of factories in the furniture, textiles, apparel, footwear and related sectors have suspended operations.

China could be a beneficiary of the disruption as companies look for an alternative. But China is also facing its largest nationwide outbreak since the middle of last year, forcing it to institute targeted lockdowns, travel restrictions and mass testing, writes Merrill Lynch economist Helen Qiao and her team in a note to clients. While that could slow the spread, the economists caution that it could take longer than during the previous outbreak and the shock to service consumption could be greater than prior waves—though smaller than in the first quarter.

The disruptions from the variant come as emerging markets have been roiled by myriad moves by Beijing to target some of its biggest companies and trade near a 20-year low against the S&P 500. That is the type of gap usually triggered by "cathartic events" like Lehman Brothers and Long-Term Capital Management's blowup in the late 1990s, according to Bank of America strategist Michael Hartnett.

The question though—especially as China continues to unveil regulatory moves and fines—like against Meituan (ticker: 3690: Hong Kong) on Friday— is when it may be safer to go discount shopping. For TS Lombard economists, they still favor shifting to emerging market stocks outside of China.

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