Christian Gattiker (Julius Baer) | Investors seeking protections may consider stocks in the healthcare and internet space, which are less exposed. However, more importantly, the recent outbreak does not change our medium- and long-term constructive view on Chinese equities. We are inclined to buy on weakness in the equity market at this stage.
The Asian equity markets remained under pressure ahead of the Chinese New Year amid fears of the outbreak of the coronavirus spreading further. Since its first detection, the CSI 300 index and Hang Seng index have dropped by 3.6% and 3.9%, respectively.
According to the latest reports so far, 25 people have died and the number of confirmed cases stands at 800. In the case of a further deterioration of the current epidemic, stocks linked to tourism and consumption will be affected the most, while stocks in the internet and healthcare sector could offer investors some downside protection.
It is still too early to assess how the situation will evolve from here. The outbreak of SARS in 2002–2003, which most investors have compared the current Wuhan outbreak to, led a 15% drawdown in market indices at the time. However, the fatality rate of SARS was much higher (9.6%) compared to the coronavirus (3.1%). Moreover, the Chinese authorities are not trying to cover up but are taking proactive countermeasures to contain the virus, such as extending travel restrictions (recently to 11 other cities apart from Wuhan) and cooperating with the World Health Organization. In terms of the equity market, the inflection point in investor sentiment happened when the second derivative, i.e., the number of new inflections, started falling.
In the short-term, Chinese equity markets could remain volatile in the case of a further deterioration of the epidemic. Investors seeking protection may consider healthcare and internet stocks, which are less exposed. However, more importantly, the recent outbreak does not change our medium- and long-term constructive view on Chinese equities. We are inclined to buy on weakness in the equity market at this stage.
