<p>One month before the coronavirus from China escalated into the pandemic we are now witnessing, Cisco Systems (NASDAQ: CSCO) blew up a Trump administration-backed proposal to engage with a couple of 5G companies. Basically, Cisco CEO Chuck Robbins saw little reason to buy a controlling stake in Nokia (NYSE: NOK) and Ericsson (NASDAQ: ERIC). Temporarily, that period was adjusted to a peak and subsequent deterioration of Norwegian shares.
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As you know, before the current pandemic that dominated the headlines, the United States and China were locked in a bitter trade war that lasted for most of 18 months.
In the last months of 2019, the parties agreed on a phase 1 trading agreement that strengthened global equities. However, many prickly problems remained.
From the perspective of the Trump administration, it was important for the White House to achieve a certain key concession. otherwise the president disturbed both economies for nothing.
To leverage, Trump sought ways to weaken China’s technological expansion. A sustainable path seemed to present a viable competitor to Huawei. Politically, Cisco would take a controlling stake in Norwegian equities and its regional rival would achieve just that.
But Robbins and Cisco were not interested in playing ball. In an interview with the Financial Times, Robbins said: “If you look at the finances of that particular business, that’s not how we run our business.”
Cisco’s CEO referred to the “lower margin of the 5G infrastructure market”. This is of course where NOK shares will see their assets either rise or fall.
And Robbins was not kidding. If you look at Cisco’s margins across the board, they are particularly higher than Nokia’s. That is not a problem in itself. Robbins noted that Nokia is well suited for the infrastructure industry. Or so it was, until now.
Panic is unfortunately very real for NOK stocks
I’m not a doctor and I do not play one on TV. But regardless of personal opinions about the current pandemic, a dynamic is obvious to everyone: the panic is real. And it really does cause a lot of damage to the markets.
According to CNBC, the Dow Jones fell 10% on Thursday, the worst loss in a day in the index since the “Black Monday” crash in 1987. This happened despite the Federal Reserve announcing a bold new initiative: pumping up to $ 1.5 trillion in it financial system to calm the nerves and restore a certain sense of order.
Specifically, when looking at NOK shares, the shares lost a staggering 16.6%. I’m not sure how the underlying company will make a comeback.
Obviously, Nokia and Ericcson are dependent on their robust business network with China. From an infrastructure point of view, you really have no better market. Although China is the market leader in almost everything, it still has particularly great potential in the wider wireless space. In June 2018, a survey showed that 68% of Chinese consumers owned smartphones. Logically, it leaves a big gap that supports the long-term dissertation for NOK shares.
Unfortunately, coronavirus is a massive nuisance. In early February, analysts warned that the coronavirus could delay China’s 5G launch. Admittedly, the degree of infection has decreased in China, but the global economic pain has just begun. In any case, it is negative for NOK shares.
Nokia meets music like everyone else
Remember I do not hate Nokia just for being negative. However, we must be realistic. As things stand, coronavirus is a black tail event.
And in such circumstances, risk-on-names such as NOK shares do not receive favorable treatment from investors. As Robbins stated, Nokia’s operations are a lower margin. It is good when the economy is booming and people are anxious to consume new technology. Right now, people are wondering if they will get a paycheck in two weeks.
This latter statement is not a hyperbole. As you know, major events – including mass revenues that generate professional sports leagues – are either postponed or suspended indefinitely. Airlines and other travel companies are also feeling the pressure. The surviving organizations are those that are currently stable and rich in cash.
I do not suggest that the NOK share goes to zero. But at the moment, the risk-reward balance is not good. I would wait on the side until the current crisis stabilized.
Josh Enomoto, a former senior business analyst at Sony Electronics, has helped broker larger contracts with Fortune Global 500 companies. In recent years, he has delivered unique, critical insights for the investment markets, as well as for various other industries, including law, construction management and healthcare. At the time of writing, he had no position in any of the above-mentioned securities.