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Coronavirus impact

Coronavirus contagion – Investment industry comments on likely effects on investment portfolios

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With coronavirus cases now confirmed in 28 different countries, but the situation not yet a pandemic, according to the WHO, a number of industry observers have commented on the likely impact of the outbreak on investment portfolios.

Louis Gargour, Founder and Senior Portfolio Manager, LNG Capital, has given his view, explaining that the exact impact and effect on the market of this virus is very difficult to model.

“Economic claims are not substantiated by epidemiologists, so if anyone claims to know how this pans out and what effect it has on the market you can be sure that it is only a guess at best,” he says.

However, he warns that the virus will affect global economies, and this could trigger a global market selloff. He points out that any comparison with the SARS outbreak is flawed as the Chinese economy is substantially different from where it was in the 2003 outbreak of SARS. 

In this view he is supported by Damian Handzy, COO of Style Analytics, a provider of factor analytics to the asset management industry. Handzy comments that the most surprising thing about their research into the likely financial effect of the coronavirus is that the closest analogy turned out to be the Chinese equity crisis of 2015.

“The 2015 situation appears to form a financial perspective closer to this than to all the other recent health and virus situations,” he says. “We found that the global markets were all up during other contagious disease outbreaks such as Ebola or Sars, which kind of surprised us but they were self-contained so didn’t scare the global markets.

“Also, China was a smaller part of the global economy at the time, whereas now it is pushing 20 per cent of world GDP.”

Gargour notes that the actions by the Chinese state to contain the virus are causing most of the economic damage currently. He writes: “The response by the government has been faster and more extensive than before, the lunar new year holiday was extended, further pushing down GDP and economic productivity and growth. Widespread travel restrictions transportation service outages and tourism coming to a complete stop has had a devastating effect on the Chinese economy. This leads us to believe that the impact of the coronavirus will be significantly larger than anything we have seen so far.”

Gargour believes that sector disruption will expand to the global economy and will not be concentrated or isolated to certain sectors. “The dislocation caused by the virus will spread across all economic sectors over time and will impact the rest of the world. The initial disruption was concentrated in the travel, tourism and luxury sectors, we have seen a 50 per cent drop in passenger numbers compared to 2019 and we’ve seen the spend of Chinese tourists in Asia drop substantially. We think that the initial drop in economic activity that has been measured in Asia (Cambodia Thailand and Hong Kong) will extend to a much larger area of impact.”

Domestically, Gargour believes that the market has underestimated the domestic disruption to the Chinese economy. “We think the market has underestimated the damage done to the domestic economy. Chinese factories have been closed now for over a week, the supply chain has been interrupted, and we believe that this will have significant effects on other economies particularly in Asia however this could trigger shortages and supply delays and outages throughout a number of industries globally. Industries that could be affected include commodity producers, manufacturers and assemblers. Steps taken by the government have been brutal, and highly disruptive to Chinese exports and productivity.”

Ben Li, analyst at Fidelity International also comments on the domestic affects of the virus.

“Within consumer discretionary, the most affected areas include hotels, travel and offline retail. Inter-city and cross-region travel, both business and leisure, will be kept to a minimum. China’s hotel industry has been going through a down cycle. The virus will delay any recovery that the market had hoped for with an improving macro outlook.

Li believes that there may be some good to come out of the virus. “Offline retail will see significant impact as consumers choose to stay at home. However, companies with higher online exposure can mitigate this. In fact, the current epidemic should speed up the development of new business models such as online grocery delivery and online education.”

Li believes that 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.”

The China market opened on Monday 3rd February with falls of close to 10 per cent. Matthew Cady, Investment Strategist at Brooks Macdonald, wrote that he took encouragement from China’s efforts to support the country’s economic growth, which saw real GDP growth of 6.1 per cent in 2019, and where policy makers are closing in on their 10-year target to double GDP by the end of this year.

Adrian Lowcock, head of personal investing at Willis Owen, an investment platform in the UK observed that it is hard for investors to sit and watch markets tumble as the virus continues to spread, but warned that selling up and moving into cash is not without its risks. 

He comments: “Whilst in the short term selling could protect from further potential losses, this could be easily offset if the money is not reinvested at the right time. Instead many wait for markets to recover before returning, which could prove detrimental.”

David Chao, Global Market Strategist, Asia Pacific (ex-Japan) at Invesco writes that from an economic growth perspective, they expect the coronavirus to have the greatest impact on China and Asia’s GDP in Q1 2020 and a slight improvement in Q2. Compared to SARS in 2003, expectations this time are for a stronger, more negative impact towards the beginning stages, as new cases should peak in Q1, he says. 

“We think that the number of new infections will moderate starting some time in Q2 as China’s and other government’s remediation responses have been swifter and much more transparent than in 2003. Accordingly, the coronavirus is expected to have the greatest impact on China’s GDP in Q1. 

“As the number of new infections moderates in Q2, with consumption returning and positive impacts of the Phase 1 deal working their way through positive corporate and consumer sentiment, we think that a rebound in economic activity will occur starting the end of the quarter.”
 

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