Watch This Key Metric in Stocks to Track Virus Recovery

(Bloomberg) -- Investors looking for insight into how well stocks will survive the coronavirus outbreak in the short term need to focus on more than just the standard financial outlooks, according to Jefferies Financial Group Inc.

Maintaining adequate levels of working capital is an immediate and pressing issue for many companies, one that needs to be sorted out within the next two months if the global economy stands a chance of weathering the current crisis, said Sean Darby, global equity strategist with Jefferies.

“It will be imperative for companies to refinance within two months as working capital deteriorates,” Darby said in a report Sunday. “While investors will try to rationalize corporate risk through EPS and sales revisions, we believe that it will be working capital requirement versus debt refinancing that will ultimately determine whether the global economy escapes from Covid-19 with a mild slowdown or a recession.”

That's especially true for service-based industries that sell “space” such as restaurants, airlines and hotels. The environment for them will likely “become quite binary” Darby said.

It's an important subplot to keep an eye on for investors looking to price in the “known unknowns,” with traditional technical indicators such as the relative strength index at extreme levels for the MSCI World Index of developed markets, he said.

In Asia, the MSCI Asia Pacific Index saw its 14-day RSI dip below 20 on Friday, when it hit its lowest level since August 2015, before bouncing back slightly on a rebound in stocks to open this week. The benchmark gauge sank 7.6% in the past seven trading days, the biggest such slide in four years.

It's worth watching out for any guidance on working capital as many Chinese companies prepare to report earnings and lenders there do what they can to help struggling firms navigate the issue.

Also read: Millions of Chinese Firms Face Collapse If Banks Don't Act

China's lenders are taking extraordinary measures to avoid recognizing bad loans, including rolling over loans to companies at risk of missing payment deadlines and relaxing guidelines on how to categorize overdue debt. Some of them are also refraining from reporting delinquencies and allowing borrowers to skip interest payments for as long as six months, according to people familiar with the matter who asked not to be named discussing internal decisions.

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cecile Vannucci

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