Charlie Awdry, China equities portfolio manager, shares his views on the current coronavirus outbreak, its impact and the implications for portfolio positioning.

   Key takeaways:

• The coronavirus is causing significant disruption to business and consumer activity as well as global supply chains
• We expect the authorities will move aggressively to ease policy to boost economic growth
• We have begun to reduce positions in selected consumer stocks and increasing positions that may benefit from fixed asset spending

We have never seen anything like the response currently occurring in China in order to minimise population movement and transmission of the covid-19 virus. The Lunar New Year holiday has been extended with schools and factories closing for longer than usual, many cities are in lockdown, and numerous quarantine measures are in place. We do not know whether these actions are proportionate to the extent of the outbreak, but we do know it is a massive show of control and power by the Chinese government, which is keen to show that they can fight any ‘battle’ successfully. The coronavirus is causing significant disruption to business and consumer activity as well as global supply chains. We expect the economic impact will be significant but difficult to quantify.

What are we observing?

Chinese equity markets have rallied strongly after the initial post-New Year holiday sell-off, probably as investors expect a pro-growth policy response. We agree with this view as we expect the authorities will move aggressively to ease policy to boost economic growth and support a rapid uptick in the economy as the virus peaks out and is contained. Since consumers may take some time to feel comfortable and confident, we anticipate the government will resort to the more rapid impact that usually comes from fixed asset investment (FAI) spending (eg. infrastructure projects). We are already seeing directives aimed at easing the burden on businesses such as reducing energy tariffs, and banks extending grace periods for debt interest payments.

Credit: Getty Images

What are we doing?

We are monitoring the virus developments and economic activity closely but have begun to reduce positions in selected consumer businesses and add more towards construction and other companies that may benefit from FAI spending because of our expectations of accommodative future policy. Banks may again be called to perform ‘national service’ and so we still avoid these shares. Healthcare has long been an attractive industry for investment driven by the tailwinds of a rapidly ageing population; this episode is a difficult reminder that much investment and reforms need to take place in the sector.

The sell-off in the market is presenting buying opportunities that we are looking to take advantage of and it will be interesting to see how investors balance near-term earnings valuations that will likely suffer due to negative profit revisions and long-term valuations that may be less affected.

The Chinese equity markets have a tendency to act first, and then think (often very simply). As usual we will be critically thinking and then acting.

 

Note:

Policy easing: efforts by a government to boost economic growth either by increasing the supply of money and lowering borrowing costs or increasing government spending and/or reducing taxes.