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The coronavirus: A buying opportunity?

Historical data suggests that epidemics do not impact markets long-term.
Business People Wearing Medical Mask Concept

With the Wuhan coronavirus already affecting 6,000 people in China and 68 additional cases in 15 other countries, global equity markets have been rattled.

Since the start of last week, Hong Kong stocks were one of the most affected, according to data from FE Fundinfo. The effect is yet to be seen in China’s onshore markets, which will resume trading next week after the extended Chinese New Year holidays.

Source: FE Fundinfo. In US dollars.

“Fears around the spread of the coronavirus are being reflected violently in global markets,” Seema Shah, chief strategist at Principal Global Investors, said in a note, adding that even companies with no businesses in China may find themselves affected.

“While companies with strong ties to China are feeling the hit, even companies that are ostensibly entirely detached from China are finding themselves impacted. The potential for a rapid domino effect, triggered by another part of the chain, has never been higher.”

Social media reactions to the coronavirus, as well as high valuations, have significantly contributed to the volatility, Shah added.

“The rise of social media means that there is a global echo chamber for major, anxiety-inducing events. The echo chamber to amplify market anxiety has never been more powerful [today].

“Asset valuations are at all-time highs. With markets ‘priced for perfection’, disruptive events, which shake investor sentiment are capable of having outsized influence,” she said.

Only short-term

A number of fund managers believe that market volatility will continue in the short-term.

For example, Francois Perrin, head of Asia at East Capital, said in a note that share prices should stabilise by the end of April.

“We expect the share price impact from the outbreak of Wuhan coronavirus to trough on or before the end of April if the number of daily reported cases reach the peak on or before mid-March,” he said.

Value Partners also believes that equity markets should recover, citing its experience with the Severe Acute Respiratory Syndrome (SARS), which lasted for six months beginning February 2003. At the time, the Hang Seng Index dropped 15%.

“Based on the experience with SARS, the equity markets will likely recover after the number of confirmed cases fall from peak levels,” the firm said in a note, adding that the Hang Seng Index rose nearly 50% in the 8 months following its lowest point in 2003.

Source: FE Fundinfo. In US dollars.

Historical data from CSOP Asset Management also shows that global stock markets recovered after epidemics were brought under control.

Source: CSOP Asset Management

“World stock markets returned quickly after epidemics were under control, with most cases even higher than the pre-epidemic time,” CSOP said.

Both East Capital and Value Partners, along with other fund managers, also reminded investors that so far, the coronavirus seems less severe than SARS. The death rate of the coronavirus is currently 2-3%, compared with 10% of SARS. However, the unknown factor is the level at which the coronavirus will peak.

Still, East Capital’s Perrin believes the lower mortality rate has significance. “The index declines due to the Wuhan coronavirus is so far expected to be of a smaller extent than during SARS in view of lower fatality rate,” East Capital’s Perrin said.

A buying opportunity? 

Given the expectation that the volatility caused by the Wuhan coronavirus is short-term, both Value Partners and CSOP AM believe that an opportunity has emerged.

“We may try to take advantage of buying opportunities amidst the current climate of caution,” Value Partners said in a research note.

CSOP also wrote that the coronavirus epidemic is assumed to be a short-term investment opportunity.

Meanwhile, Invesco recommends clients with long-term investment horizons to maintain their current allocations.

“They may want to stay the course and maintain their current allocations, as history has shown that health scares and their impacts on markets are short-lived,” Kristina Hooper, chief global market strategist at Invesco, wrote in a note to clients.

“Those with a short time horizon may want to talk their advisor about supplementing their portfolio with safe-haven asset classes, such as gold, US treasuries and low volatility equity factor strategies,” she added.

In terms of sectors, those that revolve around tourism, such as airlines, hotels and casinos, are most likely to be affected due to the expected lowered number of travellers, according to both Value Partners and East Capital.

Part of the Mark Allen Group.