Mark Williams

Coronavirus: what we know so far

Mark Williams

Coronavirus


What we know so far (as at 6 February)

 

Total confirmed cases of coronavirus (2019-nCoV) have reached over 28,000 with 563 deaths, two of which have been outside of China (in the Philippines and Hong Kong). Chinese attempts to contain the virus mean that 50 million people are reportedly in lockdown in China.

 

When the Chinese A share market reopened on Monday 3rd February after an extended Lunar New Year holiday, it dropped 8.4% with more than 3000 individual stocks limit down. It has since recovered by more than 5%.

 

The current fatality rate of c.2% (which may alter) compares to c.10% with the 2003 outbreak of SARS coronavirus (SARS-CoV).

 

As well as the virus being significantly different from that in 2003, China has obviously changed dramatically since then:

  • China now accounts for around a third of global growth, double the proportion in 2003.
  • China’s outbound tourism has increased five-fold. Total outbound tourism in 2018 was 150 million individuals, up 14.7% year-on-year.
  • Services as a percentage of GDP has increased from 42% in 2003 (during SARS) to 52% in 2018.
  • China’s reliance on exports of goods and services has declined from a peak in 2006 when exports accounted for 36% of GDP to 19.5% in 2018 (27% of GDP in 2004, post-SARS).
  • China’s share of global oil consumption has doubled from 7% in 2003 to 14% this year, becoming the largest importer of oil in 2017, surpassing the US. China’s share of global jet demand has increased from 3.8% in 2003 to 12% in 2017. China accounted for two-thirds of all new oil demand globally in 2019. Hubei province where Wuhan is located accounted for 5% of China’s gasoline consumption.
  • China and the world’s growth immediately prior to the outbreak was significantly stronger in 2003, aiding a swift recovery.

 

What next?

 

Estimates for the Q1 GDP impact are a c.0.2% hit to Asia, with forecasts of the Chinese GDP impact ranging from -2% to -4%. Outside of China, the most exposed economies are Taiwan, Vietnam and Malaysia.

 

Many economic areas will be affected, including transport, tourism, hospitality, consumer discretionary, and manufacturing supply chains (particularly where labour intensive) including technology.

 

Over the weekend, China’s central bank and a number of other agencies all pledged to keep liquidity conditions buoyant, reduce funding costs and provide targeted support to affected regions and industries – cashflow is bound to be an issue for some. On Monday, China lowered borrowing costs by cutting reverse repos rates by 10bps (7-day rate cut to 2.4%).

 

We expect further stimulus and government measures to shore up the economy including increasing the planned cap on the budget deficit-to-GDP ratio and the sale of more special government bonds. The best reaction will be to provide adequate funding to vital sectors while providing relief to those struggling in current environment.

 

The 2003 outbreak of SARS also saw marked effects, but there was a swift recovery in the following quarter. Prior to the current coronavirus outbreak, macro data in China had been showing signs of improvements.

 

It is clearly hard to predict the progress of coronavirus but, based on past experiences of outbreaks such as SARS, best estimates are for its spread to moderate (i.e. growth in infection numbers decelerates) some time from mid-February to early March, and plateau later in March.


corona virus

 

The Fund

 

The biggest impact for the Liontrust Asia Income Fund is through its Taiwanese holdings (including  Merry Electronics, King Yuan Electronics, Lotes and Wistron), Chinese stocks such as Anta Sports and JNBY Design as well as Sands China (Macau) and Thai Oil.

 

The progress of coronavirus is hard to predict but easy to monitor. We will be analysing developments and will look to take advantage of any over-reaction in regional stockmarkets. 

 

For a comprehensive list of common financial words and terms, see our glossary here.


Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Asia team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. 

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Thursday, February 6, 2020, 11:49 AM