Coronavirus and China equities – key takeaways

  • Compared to SARS back in 2003, we feel that the Chinese authorities are now much more prepared and are proactively managing the situation;
  • In terms of policy reaction, we expect the Chinese authorities will step in in a calibrated manner;
  • This outbreak should accelerate the move from offline to online across a number of businesses;
  • In healthcare, some companies stand to benefit directly from supplying medicines (e.g. anti-viral drugs) and supplies to deal with the virus.
  • We continue to be highly selective and believe our high conviction core positions have solid long-term growth prospects;
  • Overall, we expect this outbreak to have negligible impact on the markets and our portfolios in the medium-to-long term.

It is hard to predict the trajectory of the outbreak of the Wuhan Coronavirus, but compared to SARS back in 2003, we feel that the Chinese authorities are now much more prepared and are proactively managing the situation.

Many investors are looking back at SARS as an example, when markets troughed along with the peak of the outbreak and were back to original levels after less than 3 months, and higher thereafter.

We’d prefer to maintain a cautious stance and react as the situation develops and demands.

We plan to monitor the situation closely while keeping an eye on possible add/buy candidates at the right price points.

Compared to SARS back in 2003, we feel that the Chinese authorities are now much more prepared and are proactively managing the situation

Coronavirus: what is the impact on China's economy & our portfolios?

The real impact is more on travel, tourism and consumption-related industries, but we’d expect this impact to start fading as and when the outbreak has passed its peak.

As a comparison, SARS is estimated to have cost the Chinese economy 0.5% of economic growth in 2003.

In the current situation, an expected slowdown in the Chinese economy might have an impact on the more cyclical sectors of energy and materials in EM ex-China.

In terms of policy reaction, we’d expect the Chinese authorities to step in in a calibrated manner, depending on the severity of the situation and impact on the economy, as they have been doing during the trade conflict.

Coronavirus: key points

  • This outbreak should accelerate the move from offline to online across a number of businesses;
  • Companies that engage in both offline and online may suffer in their offline business in the short term but should benefit in their online business longer term. 
  • We believe that domestic liquor companies might also be impacted in the short term but this will likely be mitigated by a few factors: the premiumization trend remains intact, people are still willing to buy ultra-premium liquor at lower prices, liquor has much longer storage life than most other
  • In healthcare as well, while there may be negative short term impact as the outbreak can potentially reduce patient flow since hospitals are high-risk locations for infection, some companies stand to benefit directly from supplying medicines (e.g. anti-viral drugs) and supplies to deal with the virus.

Baijiu is one of China's most popular domestic liquors

Coronavirus and our strategies

We continue to be highly selective and believe our high conviction core positions have solid long-term growth prospects. Therefore our positioning currently remains unchanged.

Both UBS China Opportunity and UBS All China saw performance hold up well in January. 

Most notably, positions within consumer discretionary and IT proved resilient in China Opportunity while financials were a negative contributor.

At a stock level, TAL Education and Kingsoft added value while Kweichow Moutai was a notable detractor. 

Within All China, strong performance came from communication services and consumer discretionary. The main detractors included positions in financials and consumer staples.

Holdings in TAL Education and XD Inc contributed positively to performance however Kweichow Moutai was a notable detractor with 2020 guidance coming in below expectations.

Cash positions in both strategies also contributed to overall performance.

As the market seems to be directionless we will continue to monitor the situation. Overall, at this time, we expect this outbreak to have negligible impact on the markets and our portfolios in the medium to long term.

All China is the China equity investing strategy of the future, watch Bin Shi explain why here: