What should we make of the Apple Q1 guidance? The new year’s letter from Tim Cook to shareholders has caused a huge amount of market turmoil around the world: the US dollar fell by 3.5% against the Yen in the minutes after publication; European markets opened lower; Asian markets declined; and Apple’s share price continued its descent: the world’s first trillion dollar company has now lost around a third of its value over the last quarter.
While this maelstrom looks bewildering, a close reading of Cook’s letter is informative. Apple’s woes may be classified as a localised issue. Here’s what Cook actually said:
“We did not foresee the magnitude of the economic deceleration, particularly in Greater China. In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China.”
The issue for Apple is a one-country issue. If the Chinese economy had not stagnated so dramatically in the second half of 2018, in other words, Apple’s prior guidance would have held, and investors would have remained happy, instead of selling Apple and piling into US government bonds – the safe haven for the panicked.
Apple remains one of the world’s most valuable, most innovative, and most profitable companies. The China slowdown – being its largest market – has been amplified to the extent that the issues appear to be existential, and investors have responded with panicked selling.
But there is another lens through which to view this announcement, which might concern GCC investors and companies far more than any fall in the Apple share price: China itself, and its economic model, may now be less certain than we believed.
It is widely assumed that the 21st century will be China’s century. Purely by virtue of the size of its population, China deserves to be the world’s leading economy. And its phenomenal growth in the last 30 years has ensured that it is second only to the USA in terms of GDP.
However, the rapid decline in sentiment, consumer expenditure and overall economic confidence revealed by Apple was not in the script, and investors do not know where to turn. Add to this the long-held suspicions about credit quality and the shadow-banking sector, and the world’s most dynamic economy can start to resemble a house of cards.
Where will this leave those global infrastructure projects that have been occupying commentators for years now? What will happen to the Belt and Road initiative? What will become of China’s policy of commodity-driven economic colonialism in Africa and Asia?
While the world’s capital markets have been undergoing a period of profound shock over the holiday period, investors may have taken their eye of the main prize. Yes, Apple has suffered a setback in China. Does that mean the end of the growth story for Apple? Again, read Cook’s letter closely:
“Despite these challenges, we believe that our business in China has a bright future. The iOS developer community in China is among the most innovative, creative and vibrant in the world. Our products enjoy a strong following among customers, with a very high level of engagement and satisfaction. Our results in China include a new record for Services revenue, and our installed base of devices grew over the last year. We are proud to participate in the Chinese marketplace.”
This is not the sentiment of a company fearful of a collapse. And investors would do well to emulate Cook and look at the bigger picture.
The prospect of a trade war with the USA has also rattled China-watchers. And yet, next week, a new round of talks between China and the USA will begin. Observers are mistaking rhetoric and strong language for a crisis, when it may turn out that these strong words are merely a negotiating ploy.
If there is one thing we know about China, it plays a long game in international relations and in economic development. And the prize of “the China Century” is too big to risk for its leaders. China will come to an agreement with the USA over trade. The new Chinese middle class will re-discover its love affair with Apple. And the Belt and Road Initiative will continue to be the primary plank of international macro-economic policy for the People’s Republic for many years to come.
While there may be stresses to China’s internal model, the sheer size of its reserves and economic muscle, coupled with its ability to take radical steps swiftly and decisively without public debate, means that China has the firepower to resist almost any negative circumstance.
With China, it is always wise to take the long view, and this can lead to a very different perspective. It may not be time to dump equities and rush into bonds just yet.