25 February 2020
Markets remain in a state of flux following new confirmed coronavirus cases in Europe, the Middle East and Asia ex-China. The increased international spread of the virus outside of China has increased volatility and dragged major markets lower worldwide. Amid the uncertainty, we asked several of our investment managers for their longer-term views on the economic consequences of the virus and impacts for their respective asset classes.
Investment Manager, Emerging Markets Equities
While the full impact of the coronavirus remains to be seen the Chinese authorities have stepped in to provide significant support to the economy through various forms or monetary, fiscal and industry stimulus. This has increased over recent weeks as it has become clear that the impact, at least in the short-term, will likely be more disruptive than SARS with forecasts for Q1 GDP being lowered from an initial 4.5-5.5% year-over-year to some commentators expecting 1-3% year-over-year (versus 6% in Q4 2020). Although this should lead to earnings “air-pockets”, investors are looking through this period and expecting pent up demand to lead to a more modest full-year impact.
Upcoming months are expected to be volatile as further data relating to the virus is released and corporates start to report the impact of this difficult period, which is likely to be felt internationally given China’s increased role in the global economy. Sector exposure and business models are likely to dictate the impact and official commentary so far indicates new economy internet-based companies are seeing minimal disruption (and in some cases are net beneficiaries) while industry, energy and commodities are having a tougher time. We believe there are attractive investment prospects in the China market, although selectivity is key as state-owned companies may be required to step up activities in the national interest (including the large banks) and companies perceived as beneficiaries of this period may end up being over-extended in terms of price action and valuations (some technology and select online service companies).
Investment Director, Asia / China Growth Equities
The coronavirus outbreak has hurt investor sentiment, but it should pass before the early summer and we believe that its impact on company earnings, if any, will prove temporary. The Chinese government will likely roll out favourable economic policies, which, in our view, should support a quick and strong post-virus market rebound. The market will continue to monitor the trend of the new cases. We could see more volatility in stock prices if the new case number shows fluctuations in the coming weeks. The virus concern should stop driving the stock prices when the market is finally convinced that the new cases are indeed past the peak.
Investment Director, Emerging Markets Fixed Income
The coronavirus epidemic will impact global growth, though it is still unclear how severe the downturn will be. China accounts for a much larger proportion of global growth compared with 2003 when the SARS outbreak struck – 16% versus 4% – and it is far more integrated into manufacturing supply chains, suggesting that the coronavirus impact is likely be more widespread. Aggressive quarantine measures will also dent domestic consumption, a much bigger slice of Chinese GDP today. More positively, the response to contain the spread of coronavirus has been quicker and more aggressive than in the case of SARS. At that time, growth rebounded sharply once the virus was viewed as being brought under control. Although our base case has been for a similar reaction this time, with the Chinese government already implementing looser monetary policy, we are becoming increasingly concerned that 2020 global growth could fall short of our original expectations, particularly as the mortality rates of coronavirus increase.
Investment Manager, Luxury Equities
Given the likely impact of the novel coronavirus outbreak in China, it is essential to disaggregate our outlook for the short term from the long term. We do not identify a causal link between the current coronavirus situation and a change to our long-term demand outlook, which remains optimistic. The coronavirus outbreak, however, has brought about a significant reduction in tourist flows around the world, as well as store closures and curfews in China – which focus quite appropriately on remaining healthy rather than indulging in discretionary purchases like luxury goods. Recently, the shift in consumer sentiment within China also appears to be affecting local consumers in Europe and the US as fears over a worsening international epidemic mount (this should quickly recover as the concerns peak and ebb away). We expect Q1 (and to a smaller extent Q2 for sectors where inventory destocking occurs with a lag) to bear the brunt of this sales weakness, on the assumption that the current situation is a temporary, not permanent, one. Longer term, the luxury sector remains well positioned to benefit over the medium term from continued growth in emerging market (EM) middle class consumption and the recruitment of new consumers into the category.
Investment Director, Healthcare Equities
If previous epidemics are anything to go by, we expect very little impact from the coronavirus on drug companies. Experience has shown us that in a pandemic scenario, investors are often attracted to shares of companies involved in the development of an antiviral / vaccine to contain the spread of the disease. Unfortunately developing new medicines does not happen overnight, and in this instance, we would not expect to see an approval for a new drug in the near future. As an example, Gilead developed a drug called Remdesivir as a treatment for Ebola a few years ago. The drug has also been found to show antiviral activity against other viruses, including the coronavirus family, and it is now being tested in China. However, given the challenges of intellectual property, the path to approval remaining unclear, low pricing and other ethical considerations, the ultimate financial reward for Gilead is likely to be insignificant, in our view.
Investment Director, Technology Equities
An epidemic like this is not dissimilar to the dynamics of Metcalfe’s Law, geometric growth in infections should therefore not be underestimated in an increasingly connected (physically as well as digitally) world. Secondly, there are many examples of AI taking a greater role in dealing with pandemics. Inovio and Novavex are two companies who claim to have genetically sequenced the virus to develop a test vaccine, the process has taken a significantly shorter amount of time than traditional technologies. Models forecasting the spread are also increasingly driven by advanced AI algorithms. AI is a part of the next wave of digital, but together with the internet of things (IoT), 5G and abundant sources of data, we think digital will invade far deeper into traditional industries that we have seen so far – industrials and healthcare in particular could be highly vulnerable where change is not only embraced but necessitated for survival.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.