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Coronavirus – what effect on investment in China?

9 February 2020

As China continues to be on lockdown in an effort to halt the spread of coronavirus, analysts at Fidelity International have warned of the significant impact on the country’s various industries.

The most affected areas include hotels, travel and offline retail, as inner city and cross-region travel is kept to a minimum and consumers choose to stay at home.  China’s hotel industry has been suffering a down cycle, and experts believe the virus will delay any recovery that the market had hoped for.

However, companies with higher online exposure may benefit from the changing dynamics, especially the development of new business models such as online grocery and online education.

Ben Li, analyst, Fidelity International, said: “In my view, the virus outbreak may prove to be a relatively short-term disruption. Based on experience, once this goes away, demand will instantly come back at full strength if not stronger.”

The commodity market has also been severely affected, with copper falling to its lowest levels since September, and iron ore prices at their weakest since November.

James Richards, analyst, Fidelity International, said: “The impact on China’s Q1 GDP and China’s need to maintain a reasonable level of growth make it extremely likely that existing mild fiscal and monetary stimulus will be ramped up materially in order to promote the same quick demand rebound we saw with SARS in 2003.

“Large scale fiscal stimulus has historically been very positive for the mining sector but stimulus cannot commence until the spread of the virus is under control.”

According to Richards, the industry will need to await further information as to the extent that China’s supply side for materials such as steel is restricted, as well as demand, the impact on China’s inventory levels and whether this leads to changes in China’s attitude to the environment and supply side reform.

The telecoms sector has also fallen victim to the effects of the Coronavirus. In comparison to the 2003 SARS virus, Fidelity says it expects the negative effects of the Coronavirus to last longer given the number of patients infected has already exceeded that of SARS.

Kazuyuki Soma, analyst, Fidelity International, said: “Back then, the situation differed significantly market by market. This indicates even in a defensive rally, we must be very selective. From a regional perspective, mainland China telecom stocks are likely to be more adversely affected than other regions. Also, Hong Kong names could be affected by lower traffic from China in the form of lower business activity on the broadband side and softer inbound roaming revenue.”

The outlook for the property sector was altogether more positive, with the impact on mainland China expected to be limited.

Karen Zhou, analyst, Fidelity International, commented: “The outbreak of the coronavirus disrupted the Hong Kong property sector’s recovery from the previous violent protests. I remain underweight the sector. The exception is residential, where the demand is delayed but not diminished, and slowing construction activity would further restrict supply.

“In contrast to Hong Kong, mainland China’s property market has a more upbeat outlook due to a stronger macro backdrop, and I remain slightly overweight for the full year. If the rate of newly confirmed coronavirus cases can drop within the next two to three months, the impact on China developers will be limited. From a government policy perspective, it is more likely for policy to loosen than tighten.”

If the virus fails to be effectively contained by the second quarter, Zhou warns that China property stocks may be worse than expected, but considers this to be a “low probability.”

On a more positive note, Fidelity said information technology is unlikely to be negatively affected by recent events.

Wuhan is not a significant base for information technology, meaning there is no major risk to supply chain disruption. Instead, the sector’s performance will depend much more upon continued upward revisions of earnings estimates rather than the virus, Fidelity said.

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