Charlie Awdry, China equities portfolio manager shares his views on the current coronavirus outbreak, its impact and implications for portfolio positioning.
13.02.2020 | 11:11 Uhr
We have never seen anything like the response currently occurring in China in order to minimise population movement and transmission of the 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 don’t know whether this is proportionate to the outbreak or not but we do know it is a massive show of control and power by the Chinese government keen to show they can fight any “battle” successfully. The coronavirus is causing significant disruption to business and consumer activity and to global supply chains. We expect the economic impact will be significant but extremely difficult to quantify.
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 authorities to 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. Consumers will take some time to feel comfortable and confident so we expect the government will resort to the more rapid impact from fixed asset investment (FAI) spending. We are already seeing directives aimed at easing the burden on businesses such as reducing energy tariffs and banks extended grace periods for interest payments.
We will monitor the virus and economic activity closely going forward but have begun to tilt by reducing positions in some consumer businesses and adding more toward construction and FAI beneficiaries as a result of our expectations of accommodative future policy. Banks may again be called to do national service and so we still avoid their shares. Healthcare has long been an attractive industry for investment driven by the tailwinds of a rapidly aging population and this episode is a difficult reminder that much investment and reform needs to take place in the sector.
The selloff in the market is giving buying opportunities that we are looking to take advantage off and it will be interesting to see how investors balance near term earnings based valuations that will suffer due to negative profit revisions and long term valuations that will be unaffected. The Chinese equity markets have a tendency to act first, and then think (often very simply) and as usual we will be critically thinking and then acting.