The Lunar New Year has kicked off health and market fears off the back of the coronavirus but the outbreak has also provided the Year of the Rat with opportunities for investors, according to fund managers.
According to FE Analytics data, since the first known detected case of the virus on 12 December, 2019 to 31 January, 2020 the China equity funds within the Australian Core Strategies universe, have returned between 10.9% and 2.7%.
The funds only hit a bout of volatility over the last 10 days and, so far, have managed to avoid a dive in returns.
Performance of China equity funds since coronavirus outbreak to 31 January 2020
Source: FE Analytics
Over a longer timeframe, China equity funds have performed very well with the Fidelity China fund returning 137.95% over the 10 years to 31 January, 2020. The Premium China fund returned 76.46% over the same time period, signalling that the sector was resilient.
The latest Amundi Asset Management analysis of emerging market (EM) equities and the impact of the coronavirus said the outbreak had been the strongest driver behind the recent volatility in financial markets and provided the trigger for a break in the rally in risk assets that had been running uninterrupted since October 2019.
It said markets tended to overreact at the beginning of a crisis and then stabilise and rebound despite the continuation of the negative news flow.
“We see selective opportunities in EM equity given the reacceleration of earnings growth, attractive valuations and the prospect of a weaker USD,” it said.
“The short-term issue due to the Chinese situation may provide an opportunity to add to this asset class to play the extension of the cycle in uncrowded areas of the market, barring any disruption to the global outlook.”
Amundi warned that selection would remain crucial because some sectors and stocks might be more vulnerable in the short-term to the news flow on the virus.
“We focus on domestic stories, which are relatively insulated from the virus and which can benefit from strong domestic demand or the continuing shift in the value chain,” it said.
On China equities, Amundi said it was still too early to assess the impact of the outbreak as it would depend on if the virus was short-lived or not.
“We have become more cautious on the most vulnerable sectors in China, such as hospitality, aviation and consumer discretionary, which will arguably suffer some price pressure in the near term,” the report said.
“We have also become more defensive on tourism-related companies that benefit from Chinese tourists, for example, those listed in countries such as Thailand, Korea, and the Philippines.
“The impact on consumer spending is hard to assess at this stage, however we continue to closely monitor quality consumer discretionary companies that could represent a good buying opportunity should stock prices fall significantly.”
Amundi noted that once the virus tapered out, the market would recover quickly.
For East Capital’s head of Asia, Francois Perrin, said he expected the share price impact from the outbreak to trough on or before the end of April if the number of daily reported cases reached its peak on or before mid-March.
He noted that the Hang Seng Index and the Hang Seng China Enterprises Index dropped up to 15% and 8% respectively during the SARS epidemic in 2003 which had a higher fatality rate than the coronavirus so far.
“Share prices of Chinese companies in the tourism, hotel, airlines, airports, online travel, casino and insurance industries could be vulnerable near term due to the outbreak whereas online gaming, healthcare and utility sectors could benefit,” he said. “The index declines due to Wuhan Coronavirus is so far expected to be of smaller extent than during SARS in view of lower fatality rate.”
Perrin said the overall impact of the virus would be moderate for the country if its confinement measures were proven to be effective.
“Under a worst case scenario and prolonged impact on the population with confinement lasting post Chinese New Year, the virus could negatively impact China GDP growth by 0.5 to 1 percentage point in 2020 against a baseline forecast of 6.1%,” he said.
Comgest portfolio manager, Jasmine Kang, also said that strong stock selection was more important than ever despite the coronavirus as while the country’s growth had become more sustainable, high-quality companies were still rare.
“In China it is particularly important for minority shareholders to be in the same boat as the company's decision-makers and managers. Governance structures are of crucial importance for the success of long-term oriented quality growth investors,” she said.
“Despite being known for its high volatility, in the long term, the outlook for the Chinese equity market is positive
“In the Year of the Rat, investors should keep a sense of proportion and not just chase after rising prices, but rather invest in quality over the long term and be patient to achieve an optimal risk-return profile for their Chinese investment.”
Aberdeen Standards Investments head of China equities, Nicholas Yeo, said being picky with stocks would serve investors well for the year ahead. He favoured well-run industry leaders with strong balance sheets as they would be best placed to grow market share at the expense of weaker rivals.
“Average earnings growth for A-shares is expected to be 15-20% this year, based on consensus forecasts. On a 12-month forward price-to-earnings ratio, the MSCI China A Onshore Index has a lower valuation than both the MSCI World and MSCI Emerging Markets indices,” Yeo said.
“But despite the coronavirus outbreak, we think the year ahead will be more about spending. Beady-eyed investors with a nose for a good deal can seize on any sell-offs.”