The impact of the coronavirus epidemic on Chinese stocks is expected to be short-lived. We are optimistic about long-term market trends. Once the situation has normalized, we believe that investors will be presented with attractive entry points, which will allow them to benefit from long-term sustainable returns.
Here is the opinion of our Chinese equity team
1. Although China is the epicenter of the virus, how do you explain the recent recovery in onshore equity indices and the surge in inflows?
The recovery and inflows after the prolonged Chinese New Year were initially driven mainly by investments from national groups and insurance companies. Investors now seem to recover some confidence in the stock markets, with the epidemic appearing to be more contained in China (outside the Hubei province from which it originated).
2. What are the differences from the SARS epidemic?
The global impact of China’s economic slowdown is much greater today than it was 17 years ago during the SARS crisis, given China’s largest share in the global economy, global trade and global demand for oil. However, the economic damage could be contained because Beijing has adopted solid measures relatively quickly; medical care is better and online shopping supports retail sales.
3. What could be the impact on the growth prospects and company profits?
If the situation begins to normalize by March, we estimate that the negative impact on corporate profits will be 20-30% (excluding the financial part) for the 1st quarter 2020 (compared to the initial estimates). Although economic growth in the first quarter of 2020 is expected to be severely affected, we predict that the downside risk for total annual growth will be manageable. The combination of stabilized trade tensions, the recovery of global industrial activity and the possibility of greater fiscal support should allow growth to accelerate again.
4. Will the authorities focus heavily on expansive monetary policies to support economic growth?
Unlike the 2003 SARS, we believe that the Chinese authorities are taking more decisive action, blocking cities and launching warnings against travel to Wuhan. We expect Chinese monetary easing and Chinese fiscal policies to continue to support economic growth in a balanced way (for example, higher interest rate cuts, higher infrastructure spending). Overall, there may be a further delay in the deleveraging process. We can expect greater political support for the consumer sector. For the moment, we do not expect a significant easing of real estate policy.
5. When do we expect the peak of the epidemic?
According to big data analyzes, the epidemic should disappear in March, and in this case the economic damage would be limited to the first quarter. Production recovery will be gradual, as most cities are still strictly controlling worker inflows. If the number of recently confirmed infection cases in China (outside of Hubei) does not recover, we can assume that the virus is largely under control.
6. What are the main risks in 2020?
Key risks include longer than expected epidemic duration (due to Chinese workers returning to work and increasing cases of infection globally), escalating US-China trade tensions, tax support for expected from Beijing and rising credit defaults in China.
7. If there were further downside risks, would you see opportunities to enter the stock market?
Further market declines may create buying opportunities for investors seeking long-term returns on Chinese equities. Valuations of both Chinese A and H shares appear undemanding. In addition, as foreign inflows resumed rapidly in May 2003, after SARS was brought under control, investors will carefully observe the turning point in the number of new cases of infection.
8. Which sectors will lose / benefit? Will the virus lead to long-term changes?
Retail sales and travel are likely to be the hardest hit during Q1 2020, while e-commerce, IT, mobile gaming and health are expected to benefit the most. This epidemic is expected to accelerate the trend of digitization (work, education and online entertainment) in many companies.
9. What about the short term?
We favor the sectors of technology, health, consumption, and certain sectors determined at a macroeconomic level, such as cement.
10. Finally, what are the long-term investment opportunities?
We detect opportunities related to these three structural trends: technology/innovation, consumption updating, and sector consolidation.
We are optimistic about Chinese equities for a number of reasons: still, favorable earnings growth prospects, reasonable valuations, as well as positive portfolio flows in the light positioning of investors.
Sarah Johnson is a Microsoft Office Setup expert and I am working in the technology industry for the last 5 years. As a technical expert, I wrote technical blogs, white papers, and reviews for many websites such as www.office.com/setup, office setup