Investment opportunities in the East
In part two of this two part series, we asked the managers of some of our Elite Rated and Radar...
With the general public and investors concerned as to the potential impact of the Coronavirus, we have summarised the situation and gathered opinions of various asset managers.
The Coronavirus was first identified in the Chinese city of Wuhan on 31 December and has since been declared a global health emergency. Cases have been confirmed in 24 other countries across Asia, Europe and North America.
In China, at least 361 people have died, the government said today (3 February) and at least 17,205 people have been infected across the country.
In an attempt to contain the virus, a number of Chinese cities, with around 30 million people, have been placed in lock-down.
Andy Rothman, Investment Strategist at Matthews Asia, was living in the region during the SARS outbreak. “I was living in Shanghai during the 2003 SARS and 2005 bird flu outbreaks, including being quarantined during the latter epidemic,” he said. “That provided some first-hand exposure to the breathless media coverage of a novel disease, as well as the anxiety felt by many people who feared a mysterious pandemic.
“Initial genome sequencing of the Wuhan Coronavirus has already been conducted and found that it shares 79.5% of the SARS genome sequence. Some of you will remember the initial panic over the outbreak of SARS. In the end, between November 2002 and July 2003, a total of 8,098 people in 26 countries were diagnosed with SARS, and 774 died.
“To put those numbers in context, so far during the 2019-2020 influenza season, there have been an estimated 15 million flu illnesses, 140,000 hospitalisations and 8,200 deaths from flu.”
During the month of January, the Asia ex Japan stock market has fallen by around 4%*. The global stock market is down 0.1%*.
However, the Chinese equity market was down some 8% this morning (3 February)**. This is a big one-day fall, but exacerbated by the fact that it was the first trading day since the market closed for the Chinese New Year.
Using the SARS epidemic as a comparison, Kristina Hooper, chief global market strategist at Invesco, commented: “The SARS epidemic, which originated in China’s southern Guangdong province, lasted approximately six months before containment.
“It had a significantly negative impact on the Asian economy, especially in the tourism, food and beverage, retail, airlines, casinos, and property sectors. For 2003, GDP growth fell about 1% for China and slightly more than 2.5% for Hong Kong.”
“There is a possibility that new cases of the Coronavirus could continue to be reported at least until mid-February. In our view, this suggests that financial markets may be affected by first-quarter growth concerns in China, Asia as a whole, and perhaps even globally.
“We expect stock prices to continue to fall in China and other Asian markets and, to a lesser extent, globally. We also expect lower oil prices, higher gold prices, and a likely appreciation of Japanese yen against the US dollar.”
Aberdeen Standard Investments’ spokesperson added: “Tech stocks with heavy exposure to China have been hit hard, while shares in airlines in Asia, Europe and the US recorded heavy declines.
“Consumer stocks have also been hit. For example, coffee shop chain Starbucks has closed half of its 4000-plus outlets in China to support government efforts to contain the virus. Analysts estimate that China accounts for around 10% of Starbucks’ global sales.
“While analysts and market observers acknowledge that quantifying the market reaction is difficult, a number of other sectors could be severely affected in the medium to longer term. Wuhan is a major automotive hub, with plants from Nissan, PSA, Honda, General Motors and Renault. Luxury goods are also likely to feel the impact. Chinese customers account for around a third of the value of luxury goods purchases.
“The market reaction may deepen further if the virus spreads further. The most recent revelation of new infections in China and elsewhere suggests that the market will be faced with further downside risks. But when the coronavirus is successfully contained, we believe the situation should normalise and financial markets are likely to stabilise.”
Dale Nichols, manager of Fidelity China Special Situations investment trust, said: “As a company we are doing a lot of work to understand the potential impact. The best comparison is SARS and, comparing that period to today, there is no question that the response has been faster, more transparent, and initial signs around mortality are better – albeit the symptoms are slower to appear.
“If it plays out similarly to SARS, there will not be too huge an impact, but some sectors like travel will be hit in the short-term. However, long term, the trend towards more travel should remain strong.”
Dale’s colleague, Ben Li, a consumer discretionary analyst at Fidelity International, concluded: “Within consumer discretionary, the most affected areas include hotels, travel and offline retail. Offline retail will see significant impact as consumers choose to stay at home. However, companies with higher online exposure can mitigate this.
“Within retail, hypermarkets and supermarkets are holding firm and have been taking market share from wet markets, restaurants and food delivery services. Online grocery delivery is thriving with many service providers operating at full capacity.
“In my view, the virus outbreak may prove to be a relatively short-term disruption. Based on experience, once this goes away, demand will instantly come back at full strength, if not stronger. And compared to SARS in 2003, online plays a much more important role in sectors such as retail and education, which should provide some cushion.”
*Source: FE Analytics, total returns in sterling, 31 December 2019 to 31 January 2020, using MSCI AS Asia ex Japan and MSCI World indexes.
**Source: Financial Times, 3 February 2020.