The Wuhan coronavirus saw Chinese markets fall up to 9% when they opened after the extended New Year holidays on Monday with the flu-like virus infecting 17,000 in China to date.
“Fears around the spread of the coronavirus are being reflected violently in global markets,” Seema Shah, chief strategist at Principal Global Investors, said in a note, adding that even companies with no businesses in China may find themselves affected. “The potential for a rapid domino effect, triggered by another part of the chain, has never been higher.”
Social media and high market valuations have significantly contributed to the volatility, Shah added.
“The rise of social media means that there is a global echo chamber for major, anxiety-inducing events. The echo chamber to amplify market anxiety has never been more powerful [today].
“Asset valuations are at all-time highs. With markets ‘priced for perfection’, disruptive events, which shake investor sentiment are capable of having outsized influence,” she says.
Investors mixed on lessons that can be learnt from Sars
Value Partners points to its experience with the Severe Acute Respiratory Syndrome (Sars), which lasted for six months beginning February 2003, for clues about the potential market effects of the coronavirus. At the time, the Hang Seng Index dropped 15%.
“Based on the experience with Sars, the equity markets will likely recover after the number of confirmed cases fall from peak levels,” the firm said in a note, adding that the Hang Seng Index rose nearly 50% in the eight months following its lowest point in 2003.
Historical data from CSOP Asset Management also shows that global stock markets recovered after epidemics were brought under control.
“World stock markets returned quickly after epidemics were under control, with most cases even higher than the pre-epidemic time,” CSOP says.
Both East Capital and Value Partners reminded investors that, so far, the coronavirus seems less severe than Sars. The death rate of the coronavirus is currently 2-3%, compared with 10% of Sars.
The unknown factor is the level at which the coronavirus will peak. East Capital head of Asia Francois Perrin believes the lower mortality rate has significance. “The index declines due to the Wuhan coronavirus is so far expected to be of a smaller extent than during SARS in view of lower fatality rate,” says Perrin, who expects share prices should stabilise by the end of April if the number of daily reported cases reach the peak on or before mid-March.
But Lombard Odier Private Bank CIO Stephane Monier says the historical comparison to Sars may be misleading as the business cycle was then at an early stage and, consequently, valuations were much less expensive.
Monier says: “From a short-term macro point of view, we believe that the economic impact of the virus on China will be severe. China will report its forecast for growth in gross domestic product for the first quarter in mid-April, with fourth-quarter 2019 GDP posted at 6.0%.
“Sars shaved 2 percentage points from the yearly growth rate in the quarter it struck, and the coronavirus will almost certainly undermine growth. The services sector now accounts for 53% of the Chinese economy, compared with 42% in 2003. However, online retail sales make up a large share of total sales, which should provide some offset.”
A buying opportunity?
Given the expectation that the volatility caused by the Wuhan coronavirus is short-term, both Value Partners and CSOP AM believe that an opportunity has emerged.
“We may try to take advantage of buying opportunities amidst the current climate of caution,” Value Partners said in a research note.
Lombard Odier Private Bank reckons its balanced positioning, which is slightly underweight equities and overweight carry strategies with hedges in gold and US treasuries, will help navigate the current volatility. “We remain neutral on our exposure to emerging equities, as we believe that the effect of the virus will prove short-lived and we expect stimulus from the Chinese central bank,” Monier says.
Meanwhile, Invesco recommends clients with long-term investment horizons to maintain their current allocations.
“They may want to stay the course and maintain their current allocations, as history has shown that health scares and their impacts on markets are short-lived,” Kristina Hooper, chief global market strategist at Invesco, wrote in a note to clients.
“Those with a short time horizon may want to talk their adviser about supplementing their portfolio with safe-haven asset classes, such as gold, US treasuries and low volatility equity factor strategies,” she adds.
In terms of sectors, those that revolve around tourism, such as airlines, hotels and casinos, are most likely to be affected due to the expected lowered number of travellers, according to both Value Partners and East Capital.
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