For the world stock markets at least, there is some hope in the pandemic.
China, the epicenter of the new SARS coronavirus, is watching its stock market bounce back to life. That matters for China a bit more than a bounce-back matters in the U.S. because retail investors control the bulk of trading on the Shanghai and Shenzhen stock exchanges. From the January 13 peak for both the X-Trackers China CSI-300 (ASHR) exchange traded fund and the iShares MSCI China (MCHI), both are down 10% now. A bear market is a 20% correction from a 12-month high. Those two ETFs have now cut into it by half.
“From an investment point of view, the pandemic hasn’t changed much for us on China,” says Alex McDougall, head of Asian equities for Schroders in Hong Kong. “It’s the most resilient economy in Asia. It has the most centralized decision making process, so it is easier for them to right the ship.”
McDougall says he still likes China tech companies.
This week, Nomura Securities reported on its conference call with China tech giant Tencent. They said their payment volume has been recovering since March as offline businesses are getting back to normal. Nomura thinks Tencent posts 20% to 24% annualized revenue growth in the first quarter as more people used its apps during quarantine, as well as its e-commerce platforms.
At the start of the year, Matthews Asia, a San Francisco-based mutual fund company, was expecting between 10% to 15% earnings per share growth out of China, with variations across sectors. Companies are only now getting back to normal capacity, so any guidance is not definitive. Theirs is the most bullish call around.
“What is now holding back the economy is a lack of demand. This problem is particularly acute in consumer services industries, as social distancing keeps people away from restaurants, movie theatres and tourist sites. A recent broker survey of large services firms shows that while 75-85% of supply has been restored, demand is only running at 50-55% of normal levels. Many companies don’t expect full normality to return until the second half of the year.”
In a Monday note by UBS, analysts picked China consumer staples, healthcare and “stay-at-home” stocks like e-commerce as the only place to be if one wanted to be in China. Travel and tourism was a no-no.
There is some renewed — albeit cautious — optimism about China post-pandemic. Talk of a second wave before first waves even crash at the beach are evidence of people scared to go through this a second time, and not wanting to be caught flat-footed. China’s infection rates are flat, so there’s been no second wave there yet.
A big second wave, and even a third wave, is a worse case scenario.
China’s trade data came in better than worse case scenarios. Investors will hope that will be the trend going forward. Imports fell by just 0.9% during March from a year earlier. Exports dropped by 6.6%. Forecasts were for 13.9% drops in exports and 9.8% drops for imports.
China stocks beat the FTSE Emerging Markets Index (VWO) in Tuesday trading.
The Chinese economy is restarting again.
“One can always question to what extent the element of collapse in demand is baked into today’s export and import data,” says Naeem Aslam, chief market strategist for AvaTrade in London. “For now, the focus is on the silver lining. Things are looking positive.”
Industrial manufacturing activity in China is now around 80% to 90% of last year’s output capacity. Concerns over the domestic supply shock have given way to concerns over demand destruction from China’s two biggest markets — the U.S. and the European Union.
The continued quarantine measures to stop the spread of the coronavirus in those countries could continue to cloud the outlook for China’s export business, and tech companies reliant on supply and demand from overseas.
The companies that comprise the MSCI China Index have around 7% exposure to overseas markets, making it more of a pure play China investment and not one that is centered on foreign trade. Alibaba
UBS warns that substantial global equity volatility and liquidity concerns should keep the risk premium of Chinese equities elevated. There is downside pressure ahead for valuations in the short term, meaning China investors can be patient and wait for better pricing rather than buy into a rally.
In China and around the world, the pandemic is opening the door to new discussion on governance, and new ways of doing business.
This could upend entire cities and markets.
For example, floor trading on the NYSE. Is it even needed anymore? Sky high commercial real estate prices in New York and San Francisco? Needed? All of your staff can literally work in their pajamas from their dining room table.
“Topics like wealth inequality, the gig economy, household debt, universal basic income, global supply chains, and single payer health care have been hotly debated the last several years and the coronavirus will be Exhibit 1 in all of these debates going forward,” thinks Marc Odo, client portfolio manager for Swan Global Investments in Durango, Colorado.
Investor optimism will be put to the test as first quarter earnings trickle out. They’re not going to be pretty.
“It’s truly astonishing that as global economic growth forecasts are looking bleak and most countries are battling potentially one of the worst downturns in a generation, the markets are on fire and trading as though these are normal times,” says Nigel Green, chief executive at the London-based deVere Group financial advisory.
“I doubt the bear market is over,” Green says. “We shouldn’t call the bottom yet.”