Charlie Awdry, Portfolio Manager for the Chinese Equities strategy, shares his views on the current coronavirus outbreak, its economic impact and potential implications for investors.
- The coronavirus is causing significant disruption to business and consumer activity as well as global supply chains.
- We expect authorities will move aggressively to ease policy to boost economic growth.
- Investors will need to balance near-term earnings valuations, which will likely suffer due to negative profit revisions, with long-term valuations that may be less affected.
We have never seen anything like the response currently occurring in China to minimize population movement and transmission of the coronavirus (now named COVID-19). The Lunar New Year holiday has been extended, with schools and factories closing for longer than usual, while many cities are in lockdown and numerous quarantine measures are in place.
We do not know whether these actions are proportionate to the extent of the outbreak, but we do know it is a massive show of control and power by the Chinese government, which is keen to demonstrate that they can fight any battle successfully. The coronavirus is causing significant disruption to business and consumer activity as well as global supply chains. We expect the economic impact will be significant but difficult to quantify.
What Are We Observing in Equity Markets?
Chinese equity markets have rallied strongly after the initial post-New Year holiday sell-off, probably due to investors expecting a pro-growth policy response. We agree with this view, as we expect authorities will move aggressively to ease policy to boost economic growth and support a rapid uptick in the economy as the virus peaks and is eventually contained.
Since consumers may take some time to feel comfortable and confident, we anticipate the government will resort to the more rapid impact that usually comes from fixed asset investment (FAI) spending (e.g., infrastructure projects). We are already seeing directives aimed at easing the burden on businesses, such as reducing energy tariffs and banks extending grace periods for debt interest payments.
In our view, investors should continue to monitor the events in China closely. For some industries, the impact from the outbreak could be negative, including select consumer businesses and banks, which may be called to perform “national service.” In contrast, areas such as construction could benefit from an increase in FAI spending. Meanwhile, China’s health care sector has long been viewed as well positioned thanks to the tailwinds of a rapidly aging population; this episode is a difficult reminder that much investment and reforms need to take place in the sector.
It will be interesting to see how investors balance near-term earnings valuations, which will likely suffer due to negative profit revisions, with long-term valuations that may be less affected. The Chinese equity markets tend to act first, then think (often very simply). We think prudent investors should think critically and then act.
Subscribe for relevant insights delivered straight to your inbox