Hong Kong's Hang Seng is down 2% to 3% on each of the first two trading days after the Lunar New Year holiday as the severity of the Wuhan coronavirus outbreak continues to escalate.

The epidemic has so far led to a death toll of 170 in China, while the country’s health authorities said there were 7,711 confirmed cases across the country as of January 29. In addition, 15 other countries have reported cases of infections.

China and Hong Kong have made active efforts to contain the spread of the virus, with the former locking down Wuhan city and several others. But public health specialists believe the outbreak could peak around April and May, meaning the impact of the coronavirus has yet to be fully felt.

Indeed, asset owners across Asia-Pacific are bracing for the impact on the regional economy and taking risks off the table. Peter Costello, chairman of Australia’s Future Fund, said the coronavirus is the biggest short-term risk for investors.

In view of this, AsianInvestor asked six market experts about how they expect the stock markets in Hong Kong and China to fare in the first half of the year, and how the epidemic will affect the performances of other assets including bonds and alternatives. They also shared their views on how institutional investors should guard against the entailing market risks.

These contributions have been edited for clarity and brevity.

Flavia Cheong, head of Asia Pacific equities 
Aberdeen Standard Investments

 

Although A-share and Hong Kong markets have borne the brunt of the sell-off following the recent coronavirus outbreak, a risk-off sentiment has spread across Asia. This likely reflects a market that has got ahead of itself in terms of valuations.

We can expect the number of confirmed cases to rise, likely dampening markets further over the short term. Notwithstanding this, looser fiscal and monetary policies should lend support to Asian markets. Largely sound fundamentals will also help to buffer regional economies against shocks.

While Asian economies bounced back quickly after Sars, we think the economic impact from the Wuhan virus could persist for longer since these economies are in a weaker state than during that 2003 period. The broader global impact of the coronavirus will largely depend on the scale of people infected and the duration of the outbreak.

Most recently we’ve seen government bonds such as US Treasuries rally as investors have reduced exposure to equity markets in favour of so-called safe havens. The impact on private equity – given it’s unquoted – will be largely dependent on individual businesses within a portfolio exposure to certain sectors, such as tourism.

Institutional investors should focus on the structural growth drivers that are most likely to reward them over the long term, rather than respond to short-term noise. Even after headwinds from Sars from January to April 2003, the MSCI AC Asia Pacific ex Japan Index returned almost 50% that year. Small caps performed even better, with MSCI AC Asia Pac Small Cap Index delivering 56%. 

Ivan Li, director of investment research
CSL Securities

Ivan Li
Ivan Li

I am confident that valuations in the Hong Kong market are still reasonable, while liquidity is still abundant. For China's stock markets I am less sure; it’s anybody’s guess given that the A-share market seems to be “unique”, and driven by lots of non-fundamental factors. 

Most analysts (including myself) have a bad track record when it comes to wild guesses. But if I had to make a prediction I would still be bullish. After the first phase of trade deal, China will probably not let the renminbi slip too much and it may even maintain a strong currency, which would be good news to the A-share market. 

Historically, epidemics have caused panic selling but they never affect the stock market for long. This probably would be a non-event to the market, if you take a longer-term view. 

We already seeing money retreating from stocks and going into bonds. However, I believe that will not last for long. First, the panic mood will fade and animal spirits should emerge again after several months (if not weeks). Second, bonds yield are already so low and investors mainly park money in them as a safe haven, but most are not be satisfied by the low yield. Gold could also benefit as an alternative asset, given the low bond yield.

For exposure to US and European stocks, probably it’s business as usual. For exposure to Greater China stocks, it’s also too late to sell. I would be a buyer at current level, but I suggest that investors diversify geographically. Before the epidemic there was a lot of talk of an emerging market revival this year, but it's possible that this will not now be realised.

David Chao, global market strategist for Asia Pacific ex-Japan
Invesco

We expect stock prices to continue to fall in China and other Asian markets and, to a lesser extent, globally. We also expect lower oil prices, higher gold prices, and a likely appreciation of Japanese yen against the US dollar.

The market reaction may deepen further if the virus spreads further. The most recent revelation of new infections in China and elsewhere suggests that the market will be faced with further downside risks. But when the coronavirus is successfully contained, we believe the situation should normalise and financial markets are likely to stabilise.

After all, it is worth to note that an outbreak’s effect on market confidence can far exceed its actual impact. Investors with longer time horizons may want to stay the course and maintain their current allocations, as history has shown that health scares and their impact on markets are very short-lived. 

In order to guard against unforeseen market risks, it makes sense for both retail and institutional investors to craft on a well-diversified portfolio – which includes a healthy balance of equities, fixed income and alternatives such as safe-haven assets and even private equity.

Esty Dwek, head of global market strategy, dynamic solution 
Natixis Investment Managers

 

In the short term, we expect to see heightened volatility with sell-offs or corrections followed by periods of stabilisation, as we saw this week. We believe the China and Hong Kong markets may play catch up to other global markets and rebound once the virus appears under control, as we have seen in such situations historically. Improvements in trade should help China and Hong Kong recover once the coronavirus is contained.

Bond yields are likely to remain depressed as the epidemic spreads, as sovereigns and gold have been key beneficiaries of defensive capital flows. Further out, we expect yields to resume their gradual upward move but we believe they will remain lower than anticipated at the end of 2019. Questions surrounding the impact of the coronavirus on Chinese and global growth added to meagre expected levels for 2020 imply little upside to bond yields, especially given still-low inflation.

For now, we have reduced our risk asset exposure somewhat in anticipation of heightened volatility in the coming weeks, although we maintain an overweight versus bonds. We believe that the backdrop remains generally constructive, in large part thanks to abundant liquidity from accommodative central banks.

Many institutional investors have already shifted allocation more towards illiquid alternatives, where you typically do not have mark-to-market pricing, suggesting lower realised volatility in their portfolios.

Tai Hui, Asia chief market strategist
JP Morgan Asset Management

 

We expect economic activities in China and Hong Kong to take a hit in the months ahead. China is extending its Lunar New Year holiday until early February, while advising people to stay home. Naturally, this is going to impact on China and Hong Kong markets, especially the retail sector, the most considering the economic exposure.

The spill over economic impact on the rest of the world will depend on whether the spread of virus is contained. Global exporters who are dependent on China's economic rebound, such as those in Europe, is very likely to see a delay in recovery.

Asia investors should diversify their asset allocation at this point, both by asset class and geography. The direct economic and earnings impact from the outbreak on US and European companies are likely to be limited. Even within Asia, some sectors are likely to see greater resilience on their earnings performance. Asian technology companies with global business exposure is likely to face less volatility in this environment.

It is also important to focus on the long term, and the fact that economic activities should bounce back once the outbreak subsides. Uncertainties from the outbreak are also expected to reinforce the dovish bias for central banks around the world, especially China when it prepares to support the economy once the outbreak is contained. This should provide support to government bonds and selected Asian and Chinese high grade corporate credits.

Vishnu Varathan, head of economics and strategy for Asia and Oceania treasury
Mizuho Bank

Consistent with the Sars experience, equities that are vulnerable to deeper correction from “risk off” will deepen in coming weeks as escalating contagion and mortality from the Wuhan virus plunges markets into uncertainty about how the virus evolves as it proliferates.

The Sars cycle of sell-off (over one to two months) and recovery (over two to four months) with a cumulative 10% to 20% drop in equities at the worst is a good reference given the parallels. But the drop and duration need not be a faithful re-run, given uncertainty about how the virus evolves and the contagion plays out.

We expect two-halves in the markets with risks of a deeper pullback of 15% to 25% over the next two to three months in equities followed by a fairly quick recovery later in the second quarter. And to be sure, these convulsions of “risk off” will trigger a wider capitulation of capital, manifesting as larger risk premiums, or wider bond spreads and drops in investment valuations.

Inevitably, given elevated uncertainty investors will not be able to precisely position portfolios for buckles, bottom and bounce. Thus, more defensive positions into healthcare, with a rotation out of travel, hospitality and construction, alongside increased hedges in safe-haven, will increase resilience.