Coronavirus impact: Fund manager views from Asia
The new coronavirus that emerged from the Chinese city of Wuhan continues to dominate global headlines and has triggered market sell-offs around the world, hitting sectors such as airlines and tourism the hardest. Here our fund managers who cover Asia give their views on how this outbreak is playing out at market and macroeconomic level and what the possible short- and long-term implications could be for investors.
Alex Duffy - Fidelity Global Emerging Markets Fund
The economic impact of the coronavirus on consumption and travel patterns in China, as well as on global markets, has already become evident. It is hard to predict when this outbreak will be contained, but it is important to highlight that the Chinese government has taken proactive steps to control the spread of the virus, imposing large scale quarantines across China and China-Hong Kong travel restrictions, for example. This is clearly a human tragedy, given the scale of infection and fatality rate. As a market even, however, such cases tend to be less significant or long term in nature and the correction can create the opportunity to buy attractive businesses at relatively more reasonable valuations.
Whilst there are some clear commonalities with SARS, it is worth highlighting that it had higher fatality rates (10%) against the Coronavirus (current 2%). However, as the importance of China has since then grown as a component of global GDP but also within global supply chains, we should envision a greater shock to aggregate demand. Today, markets are also not ‘cheap’ from a historic valuation perspective, so this drawdown could to an extent be more substantial. Nevertheless, given the experience with SARS, we still believe that the market is more likely to look through this episode and this is the base case upon which we are operating.
At the portfolio level, we certainly believe that there will be a significant impact on near term operating performance of Chinese companies in which we are invested. The clothing manufacturer Shenzhou International, for example, is a large employer and will likely be unable to restart production lines until the quarantines are lifted. Elsewhere, the soy producer Foshan Haitian Flavouring has a large B2B business which will be impacted by fewer out of home meals. BOC Aviation, the aircraft lessor for the Asian region, is also set to experience near-term pressure. However, businesses operating in the internet sphere like Alibaba will not be as affected, as operating in the e-commerce sphere places them well to meet consumer demand in a period of limited mobility.
Nevertheless, it is important to reiterate that all the holdings in the portfolio are high quality and long-term names, characterised by a solid foundation of a robust corporate governance profile and balance sheet structure to weather more difficult economic environments. We thus do not see these events as permanently impacting the investment theses. Moreover, it is also important to reiterate that diversification is a key consideration in the portfolio construction process, with the aim of reducing the risk of it being impacted by a single event.
Anthony Srom - Fidelity Asia Fund
"The outbreak of Coronavirus is already starting to see an economic impact with flights to and from China cancelled, a slowdown in consumption over Chinese New Year and a number of international businesses announcing a suspension of manufacturing in China. The economy will undoubtedly be impacted, but I believe this is just a painful bump in a structural slowdown of growth over the next few years. In terms of the portfolio, Shangri-La Asia (hotels in China and HK) and BOC Aviation (aircraft lessor across Asia) will be the most directly impacted. However, I think this will prove to be a short-term blip that may even prove to be an interesting opportunity to top up. I do expect the A-share market to open weaker on negative sentiment and it will continue to be a choppy period for markets overall. In the last couple of months market returns across Asia have been driven by health care and tech-related stocks as investors possibly seek perceived safety and growth. The outbreak of the Coronavirus is likely to see this trend continue. However, I still do not believe valuations in these areas stack up and offer an attractive risk/reward. More recently, I have been adding to India as the market has been a laggard and relative valuations have become more attractive."
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