The Coronavirus and its impact upon investment markets from Jilly Mann

Posted by melaniebond

In pure investment terms, the Coronavirus has definitely had an impact on stock markets in 2020, but that impact has not yet been catastrophic. I say yet, because there are so many unknowns still surrounding the virus, the technicalities of which are beyond most investment professional’s realms of expertise.

To take the Janus Henderson China Opportunities fund in isolation, the fund is up 0.74% year to date. Whilst such a return is nothing to shout about, a bit of context is needed. The fund lost over 12% from peak  to trough in January 2020 when the coronavirus started to take hold and so there has been a recovery of 6% from its lows of late January. The Chinese stock market had an extended break for the Lunar New Year which saw a pent up sell down of assets once it reopened on 3rd February 2020, but again the Chinese Stock Market itself has staged a similar recovery to that of the Janus Henderson fund since then.

The question of whether to sell out of China and perhaps broader Asia remains. To counter this argument is the expectation that if confirmed cases of Coronavirus slow or the virus shows signs of being under control, the Chinese Government will roll out widespread policy stimulus measures to prop up the market and minimise any reduction in GDP numbers below the 6% year-on-year target that at the moment appear likely when the Q1 figures are released. Should the virus spread however, the focus shall be on containment rather than stimulus and one could foresee a period of inertia in the Chinese markets as trade and travel grind to a halt.

There have been global outbreaks before such as SARs epidemic. Already though Coronavirus has spread faster than SARs due to it’s longer incubation period and the mass migration of people which inevitably heightens during the Lunar New Year period. With restrictions on travel and movement to and from work impacting upon production, a knock-on effect on the wider Asian region in particular could be expected.

To provide some context regarding the impact on global trade, according to Schroders, China’s share of world GDP has risen to 15.8% with 35% of global growth coming from China in 2018. Comparing this to China’s share of world trade at the time of the SARs outbreak in 2002, China made up just 4.2% of world GDP and contributed 18% of global growth.

The fall in the oil price that we have seen since the outbreak began (-14.5% year to date) is further testament to global economic uncertainties whilst the scale of the virus is being established.

The wider Asian region may also be affected as Thailand, Japan, Singapore, Vietnam and Indonesia make up the top five destinations for Chinese holiday-makers (according to the China outbound tourism report 2017). If the Chinese are unable to travel or those countries refuse to accept visitors from China, then clearly this will impact the flow of money into those economies and will similarly affect the movement of traded goods.

The reasons we invest in China and have increased our allocation in recent years are many. On pure economic grounds; the Chinese population is 1.4bn vs the US population of 329mn, 772mn users of the internet (55%) in China vs 292mn users in the US (89%), 717mn users of smartphones (51%) in China vs 226mn in the US (69%), 527mn users of mobile payments in China (37%) vs 48mn (15%) in the US. Source: EPFR Global, Citi Research, as at 12 April 2018., as at 31 December 2017.

In pure growth terms, China has skipped ahead of Westernised economies straight to the internet with faster penetration and greater reliance on technology stocks such as Alibaba and Tencent. Those companies aren’t directly related to the Coronavirus and represent a trend that will continue irrespective of the virus, but undoubtedly sentiment and temporary restrictions may impact short term profitability.

China has also undergone a period of reform with a crackdown on anti-corruption which has been seen as a positive, but this in itself is something we are keeping a close eye on. Whilst much good has been accomplished in President Xi’s early years in office, there is a sense of empire-building taking place and allied to that are the distasteful scenes we increasingly see of state action against members of the public both in Hong Kong and more recently as they round up suspected carriers of the coronavirus in Wu Han. These images are flashbacks to a world not seen since some of the worst times of the 20th Century. Despite the furore Donald Trump’s trade wars with China have caused, globally there is widespread support for the actions President Trump has taken and so China could feasibly be at a mini crossroads. How they handle the virus spreading from here and the public perception of their actions will largely ordain how collaborative or isolated they become as an economic trading power over the next few years.

We invest in China knowing the potential pitfalls and the rules of their regime which are alien to our way of doing things, we cannot pretend that the last few weeks are a surprise, but they do give us pause for thought about whether we remain invested in the near term or accept the recovery and move away for now.

When SARs came under control, the stock market rallied tremendously and a similar thing could easily happen post Coronavirus, especially with state policy intervention. Should the situation deteriorate then it won’t just be China affected, global stock markets will react downwards as one, albeit temporarily and so whilst it would be easy to see selling China as the answer, it may not solve any issues. The Coronavirus has raised issues beyond markets into the realms of how far China has progressed or otherwise on a human level, the stocks themselves such as Alibaba and Tencent will be the Amazons and Facebooks of the 21st century so that isn’t in doubt in our minds, but one cannot ignore those disturbing press images when deciding if it is an economy we wish to be exposed to or potentially risk being left behind should we sell out as its global juggernaut status continues.