have never seen anything like the response currently occurring in China
in order to minimise population movement and transmission of the virus.
The Lunar New Year holiday has been extended with schools and factories
closing for longer than usual, many cities are in lockdown, and
numerous quarantine measures are in place. We don’t know whether this is
proportionate to the outbreak or not but we do know it is a massive
show of control and power by the Chinese government keen to show they
can fight any “battle” successfully. The coronavirus is causing
significant disruption to business and consumer activity and to global
supply chains. We expect the economic impact will be significant but
extremely difficult to quantify.
equity markets have rallied strongly after the initial post New Year
holiday sell off probably as investors expect a pro-growth policy
response. We agree with this view as we expect authorities to move
aggressively to ease policy to boost economic growth and support a rapid
uptick in the economy as the virus peaks out and is contained.
Consumers will take some time to feel comfortable and confident so we
expect the government will resort to the more rapid impact from fixed
asset investment (FAI) spending. We are already seeing directives aimed
at easing the burden on businesses such as reducing energy tariffs and
banks extended grace periods for interest payments.
will monitor the virus and economic activity closely going forward but
have begun to tilt by reducing positions in some consumer businesses and
adding more toward construction and FAI beneficiaries as a result of
our expectations of accommodative future policy. Banks may again be
called to do national service and so we still avoid their shares.
Healthcare has long been an attractive industry for investment driven by
the tailwinds of a rapidly aging population and this episode is a
difficult reminder that much investment and reform needs to take place
in the sector.
selloff in the market is giving buying opportunities that we are
looking to take advantage off and it will be interesting to see how
investors balance near term earnings based valuations that will suffer
due to negative profit revisions and long term valuations that will be
unaffected. The Chinese equity markets have a tendency to act first, and
then think (often very simply) and as usual we will be critically
thinking and then acting.