Buy the winners
Our base case: we still think the coronavirus situation is similar to SARS and the bird flu and our team's investment philosophy of "buy the winners" in China's stock market has not changed.
The consumption story remains very important especially in the premium segments
How will the coronavirus impact the Chinese economy?
The impact of the corona virus on Chinese GDP could be quite significant, also compared to previous incidents such as SARS, bird flu, swine flue, ebola etc.
That's because the amount of precautions have been much more significant, e.g. the closing of factories or the government's measures like shutting off whole areas.
But there's also a big impact from the different behavior of individuals, like not going to restaurants, movies, etc. But we are also starting to see "back to business" with some factories reopening this week.
Chinese stock markets have recovered significantly since the initial sharp fall. What does that tell us about how investors are viewing the coronavirus situation?
The markets have been more resilient than expected. The MSCI China index has risen 1.8% YTD to 13 Feb 2020 while MSCI China A has fallen 1.4%. Chinese onshore fell sharply when they reopened on 3 February. Around 80% of stocks fell by 10% which is the limit down for daily losses. On the next day, stock prices recovered significantly.
It appears the market is willing to overlook what it views as a temporary fall in earnings, especially for the high quality stocks. This expectation is supported by prior instances like SARS etc. Markets also take into account that the basic economy had been stabilizing, with the US – China phase 1 trade deal and a better tone in the global economy.
Some stocks have benefited from this situation. This was the case where the business model is also based on online-activities, e.g. in the online education sector. Students who didn't go to school for some time due to the virus joined online tutorials which has increased demand for these services. TAL Education*, one of our holdings, is very well positioned.
Tencent and NetEase also rose on expectation of higher gaming revenues as people spend more time on games while having to stay home.
And have you made any major portfolio changes because of the coronavirus situation?
Uncertainty is still too high to make "big calls"
During this phase, we haven't moved large amounts of money in our China and Emerging Markets equities portfolios as stocks we like haven't fallen much.
In our portfolios, we have not made big moves in our China and Emerging Markets equities portfolios, given that the stocks we like haven’t fallen much. In fact, as mentioned earlier, some have gone up.
Plus at this stage there is still quite some uncertainty around how the situation might develop. We do not wish to use up our risk budgets by bringing China to a maximum weight in our Emerging Markets equities portfolios.
While there's still the possibility of a "Black Swan" event, past evidence suggests that unless the coronavirus is much worse than others then this is not the time to be selling out.
Perspectives matter. Tune in to our insights.
Has your outlook changed due to the coronavirus situation?
Our base case: we still think this is similar to SARS and the bird flu, which doesn't change the fundamental story. Our clients are investing in the winners of the transformation of the Chinese economy.
In China, consumption is now more than 50% of the economy. The consumption story remains very important, especially the premium segments of the consumer sector offer attractive opportunities.
In case of permanent measures to contain the coronavirus, consumer behavior might change. We would then look for companies in the healthcare sector which would likely benefit from this situation.
In contrast to other emerging markets, population demographics trend in China is negative, leading to an ageing population. This trend again produces winners and losers. The losers are mostly in the manufacturing sectors, winners are among healthcare, insurance and wealth management, sectors we are all invested in.
Some new institutional investors have asked the investment team to speed up the funding process of their mandates to take advantage of the uncertainty. They view the coronavirus as an entry opportunity.
Timing the market is difficult. In China, Asia and Emerging Markets, it's all about active returns so you need to be invested in the market to benefit from the market. If an investor would like to strategically increase their weight in China, this is as good a time as any.
Buy the winners
Invest in the winners of the Chinese economy