Investors take risk-off approach to virus impact
Despite mainland Chinese authorities' attempt to contain the Wuhan coronavirus, the disease has already spread across the Asia-Pacific region. Institutional investors see the fallout from this contagion as a major risk, at least in the short term.
“This is a large risk-off event, similar to Iran [and its tension with the US] earlier in the year, but more China-centric and longer in time,” Alicia Garcia Ferrero, chief economist for Asia-Pacific at Natixis, told AsianInvestor.
Asset owners across Asia-Pacific are bracing for the impact on the regional economy. Peter Costello, chairman of Australia’s Future Fund, said the coronavirus is the biggest short-term risk for investors.
“I see it as an immediate negative. Obviously, we hope that the measures that have been taken now will contain the virus, but it’s still far too early [to say],” he told AsianInvestor.
Costello reckons the coronavirus is likely to crimp regional economic growth, including in the Future Fund's home country.
“There’s obviously going to be an effect on tourism to Australia. That will affect airlines, it will affect airports, it will affect general consumption at a time when many tourist industries have also been badly hit by the effects of bushfires,” he said.
The impact of the disease has been marked. Major regional stock indexes registered sharp falls at the beginning of this week (China's Shanghai Composite Index down 2.7%, the Hang Seng Index of Hong Kong down 1% and the Japan's Nikkei index down 2%) and markets remain wary of the impact of this new virus outbreak.
Many market observers look back to the Sars outbreak of 2002 and 2003 for guidelines on the potential impact. That viral pandemic killed almost 10% of the more than 8,000 people it sickened, according to the US Centers for Disease Control and Prevention, and most of the deaths were in China.
To date the coronavirus has infected over 6,000, with its death toll having reached 132, all in China so far. But it is still relatively early days.
Qian Wang, Vanguard’s Asia-Pacific chief economist, said Sars knocked 2% off China’s GDP growth in the second quarter of 2003, with transportation, tourism and hospitality hit especially hard.
“Those sectors as well as retail will likely be among the hardest-hit again,” he said.
Francois Perrin, head of Asia at East Capital in Hong Kong, said investors are right to be concerned, but added that comparisons with the Sars outbreak in 2002/3 are only partially helpful in assessing the likely impact.
“From the Sars episode, you can assume that the peak of the reported cases will most likely be reached six weeks from now. So far, the coronavirus has been much less lethal than Sars, with a 2% to 3% death rate versus 10%, and this is encouraging,” he said.
MASSIVE TRANSMISSION RISK
As Perrin points out, however, connectivity and transportation have been through major changes over the past 20 years in Asia and the Sars model does not capture that evolution.
In addition the coronavirus spread just before the Lunar New Year mass migration, in which hundreds of millions of Chinese conduct about 3 billion trips around the country and beyond. While concerns about the spread of the disease have reduced this level of movement this year, even at a scaled-down version it has greatly increased the risk of transmission throughout China and abroad.
Nonetheless, in view of the less-lethal characteristics of the current 2019-nCoV virus and the measures taken by the Chinese authorities to contain its progression, Perrin reckons that investors have “potentially overreacted”.
From the asset owners' perspective, on the plus side, the Future Fund's Costello is encouraged by how the Chinese authorities are handling the situation.
“It appears that the Chinese are taking very strong measures, with exclusion zones and travel restrictions, which is good. But obviously, the virus has escaped China at this point. We don’t know when this is going to be contained, all we can say is that it will be a negative in the short-term,” he said.
DEFENSIVE MEASURES
Assuming the latest virus outbreak will not be as bad as Sars, what defensive strategy should investors adopt?
"Any safe assets in countries which are not too dependent on China will benefit," argued Garcia Ferrero. "For currencies, that means the US dollar and yen will appreciate, but not the Thai baht, as Thailand is now very dependent on Chinese tourists.
“Also go long gold but short commodities, due to less demand from China. This could be reversed if China announces a stimulus package.”
For stock markets more broadly, Perrin said a nadir is likely in the coming weeks. “We expect the share price impact from the outbreak of the Wuhan coronavirus to trough on or before the end of April," he said. "That is if the number of daily reported cases reach the peak by mid-March, three weeks after the end of the Spring festival travel rush."
Major indexes such as the Hang Seng Index and Hang Seng China Enterprises Index, which dropped up to 15% and 8% respectively during the Sars epidemic in 2003, will likely have less downside from the Wuhan coronavirus, he added.
The 2003 outbreak of Sars caused up to $18 billion in economic losses and knocked 0.6% off Asia’s economic growth rate, according to an estimate by the Asian Development Bank. But markets tend to recover fairly swiftly.
Asian investors looking for safe havens in early 2020 should be encouraged that, while it is too early to read into the ultimate timing or impact of the current outbreak, the experience of previous influenza outbreaks would suggest that market dislocations typically recover in full over a relatively short time frame.