Revisiting China’s Equity Markets as Coronavirus Spreads
Growing fears about the coronavirus have hit Chinese stocks. While markets will remain unstable until China gets the outbreak under control, equity investors should revisit lessons from previous epidemics and consider the potential longer-term effects of the current crisis.
As the death toll rose and global infections spread, investors’ reaction to the coronavirus intensified. The MSCI China A Onshore Index tumbled by 9.2% on February 3 in US-dollar terms, then rebounded by 3.1% the next day. The declines followed a 2019 rally in which Chinese stocks surged by more than 37%. Investors fear that the lockdown of millions of people could inflict a big blow on China’s economy that might also affect global growth.
Market Rebounds Are Often Quick
These concerns are understandable. However, in similar past episodes, market corrections were relatively brief and comparatively shallow. For example, during the severe acute respiratory syndrome (SARS) epidemic in 2003, the Hang Seng Index dropped by about 7.7% from March 5 through April 25, when new infections were increasing, but recovered quickly when the situation improved. Similar market patterns have played out in previous epidemics and pandemics. In each case, market sentiment shifted from initial panic to bargain-hunting when investors gained confidence that the disease had come under control.
For now, there’s no such certainty about the coronavirus. As a result, the volatility we’ve seen will probably persist until some tangible good news is received. But investors should also remember that the snap back from panic to positive momentum can be quick—especially in China’s markets, which are dominated by retail investors.
Varied Effects on Production and Consumption
Even without clarity on the virus, the potential macroeconomic effects can be assessed. Efforts to stem the spread of the virus by confining people to homes and imposing a quarantine on entire cities will, of course, have a real impact on the economy, via production and consumption.
Over the last two decades, China has become the world’s factory, supplying goods and raw materials to many industries. Factory shutdowns are likely to result in varying degrees of supply disruption. For example, Wuhan—the epicenter of the coronavirus—is a manufacturing hub for telecom equipment, from fiber optic cables to printed circuit boards (PCBs). Production of these components may be impacted, which would have broader implications for technology supply chains, both in China and potentially globally, if the disruptions persist.
Wuhan is also the headquarters for a few large industrial companies, including one of the largest automakers in China. At these companies, production will undoubtedly be curtailed until the outbreak comes under control and the factories can resume normal operations.
Declining consumption will hurt retailers—especially those with predominantly brick-and-mortar stores. However, e-commerce companies may weather the storm well, as consumers shift demand to online retail vendors. Some of China’s online supermarkets and food delivery services have already reported increased usage as shoppers stay away from stores. Investors will need to monitor how different industries and companies will be affected in different ways by fallout from the coronavirus crisis.
This commentary was authored by John Lin, Portfolio Manager, China Equities, AllianceBernstein, & Stuart Rae, Chief Investment Officer, Asia-Pacific Value Equities AllianceBernstein on Feb 7.