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The new coronavirus that emerged from the Chinese city of Wuhan continues to dominate global headlines and has triggered market sell-offs around the world, hitting sectors such as airlines and tourism the hardest. Here our fund managers who cover Asia give their views on how this outbreak is playing out at market and macroeconomic level and what the possible short- and long-term implications could be for investors.

Background

As of 29 January, the death toll from the coronavirus is over 130, while the number of confirmed cases is around 6,000, surpassing mainland China’s total number of confirmed infections during the 2002-2003 SARS outbreak.

The situation remains highly changeable. Already China has curtailed travel to and from the worst affected areas. National holidays over the Lunar New Year period have been extended, with schools and businesses remaining closed in an attempt to avoid further infections from the virus.

Markets in mainland China also remain closed for the holiday, but shares sold off sharply in Hong Kong on Wednesday in their first session after trading resumed. Risk assets have been volatile across global markets in recent sessions.

Near-term impact

Investor sentiment has weakened most in those regional and global sectors most sensitive to Chinese consumption, like travel, hospitality and financial services. However, this volatility is likely to be a near-term phenomenon. Seasonal effects on trading are also a factor, as prices are moving more sharply on low volumes often seen during the holiday period.

Paras Anand, Chief Investment Officer, Asia Pacific, says: “While there is clear sensitivity to impact on short-term demand, it is important to consider any sell-down in the context of markets that have performed very strongly over recent quarters. Looking more broadly, movements in US bond markets and the US dollar imply a modest softening in risk appetite, but little more at this stage.”

Given how quickly the situation is moving, however, our fund managers will typically seek to avoid trading on news flow and instead focus on longer-term themes and corporate fundamentals. However, it is worth noting that prevailing market conditions in China are different this time compared to the SARS outbreak 17 years ago.

Lynda Zhou, Portfolio Manager, says: “Back in 2003, we were in the middle of a big bear market cycle. This time, with much better information flow and effective control policies from the government, the weakness in the market should be shorter, in my view.”

Macroeconomic and consumption implications

While it is too early to quantify the true market and economic fallout from this outbreak, investors should expect some impact to be reflected in China’s first quarter macro data. Lunar New Year is typically a high season for consumer demand, with plenty of additional spending, and the coronavirus outbreak means the opposite may be true this year. Everything from online food deliveries to courier businesses to infrastructure investment and construction activity may be impacted.

Jing Ning, Portfolio Manager, says: “We are likely to see disappointing economic data in the first quarter in this environment, and consumption will be impacted. I am witnessing firsthand a notable slowdown in online consumption, as a combination of Lunar New Year holidays as well as fear of contagion has slowed the delivery network to a near standstill.”

While online shopping companies such as Alibaba may eventually see things improve if the quarantine measures persist, other types of online businesses such as gaming services remain intact and accessible as people stay in their homes. Companies that sell over-the counter cold and flu remedies may also see significant share price strength.

Longer-term opportunities, especially in innovation
Longer-term, China’s structural consumption growth story remains firmly in place. We continue to favour sectors and strategies aligned to innovation in China, and to see companies in this space as market share gainers despite any near-term disruptions.

These include sectors like online education service providers, online grocery, e-commerce and express delivery, and innovative healthcare solution providers. At the same time, these sectors should be well placed to benefit from pent-up demand in any recovery scenario once the outbreak is brought under control, especially if the government introduces measures to combat the possible dent in Chinese GDP growth.

Hyomi Jie, Portfolio Manager, says: “China has been easing liquidity since mid-2019, and the positive impact on the real economy was just beginning to take effect. In response to the current situation, the government may start implementing more monetary and fiscal easing policies, which are likely to accelerate sentiment and business recovery from the second half of 2020 onward.”

Alex Duffy – Fidelity Global Emerging Markets Fund

The economic impact of the coronavirus on consumption and travel patterns in China, as well as on global markets, has already become evident. It is hard to predict when this outbreak will be contained, but it is important to highlight that the Chinese government has taken proactive steps to control the spread of the virus, imposing large scale quarantines across China and China-Hong Kong travel restrictions, for example. This is clearly a human tragedy, given the scale of infection and fatality rate. As a market even, however, such cases tend to be less significant or long term in nature and the correction can create the opportunity to buy attractive businesses at relatively more reasonable valuations.

Whilst there are some clear commonalities with SARS, it is worth highlighting that it had higher fatality rates (10%) against the Coronavirus (current 2%). However, as the importance of China has since then grown as a component of global GDP but also within global supply chains, we should envision a greater shock to aggregate demand. Today, markets are also not ‘cheap’ from a historic valuation perspective, so this drawdown could to an extent be more substantial. Nevertheless, given the experience with SARS, we still believe that the market is more likely to look through this episode and this is the base case upon which we are operating.

At the portfolio level, we certainly believe that there will be a significant impact on near term operating performance of Chinese companies in which we are invested. The clothing manufacturer Shenzhou International, for example, is a large employer and will likely be unable to restart production lines until the quarantines are lifted. Elsewhere, the soy producer Foshan Haitian Flavouring has a large B2B business which will be impacted by fewer out of home meals. BOC Aviation, the aircraft lessor for the Asian region, is also set to experience near-term pressure. However, businesses operating in the internet sphere like Alibaba will not be as affected, as operating in the e-commerce sphere places them well to meet consumer demand in a period of limited mobility.

Nevertheless, it is important to reiterate that all the holdings in the portfolio are high quality and long-term names, characterised by a solid foundation of a robust corporate governance profile and balance sheet structure to weather more difficult economic environments. We thus do not see these events as permanently impacting the investment theses. Moreover, it is also important to reiterate that diversification is a key consideration in the portfolio construction process, with the aim of reducing the risk of it being impacted by a single event.

Anthony Srom – Fidelity Asia Fund

“The outbreak of Coronavirus is already starting to see an economic impact with flights to and from China cancelled, a slowdown in consumption over Chinese New Year and a number of international businesses announcing a suspension of manufacturing in China. The economy will undoubtedly be impacted, but I believe this is just a painful bump in a structural slowdown of growth over the next few years. In terms of the portfolio, Shangri-La Asia (hotels in China and HK) and BOC Aviation (aircraft lessor across Asia) will be the most directly impacted. However, I think this will prove to be a short-term blip that may even prove to be an interesting opportunity to top up. I do expect the A-share market to open weaker on negative sentiment and it will continue to be a choppy period for markets overall. In the last couple of months market returns across Asia have been driven by health care and tech-related stocks as investors possibly seek perceived safety and growth. The outbreak of the Coronavirus is likely to see this trend continue. However, I still do not believe valuations in these areas stack up and offer an attractive risk/reward. More recently, I have been adding to India as the market has been a laggard and relative valuations have become more attractive.”

Published by Fidelity International investment experts, Fidelity