It is impossible not to
talk about the coronavirus. It starts, of course, with recognizing the severity
of the outbreak and the need for empathy as the human toll continues to rise.
There also are the usual media and political accusations against China: that
the numbers could be false and China may be hiding the truth. And it is not
easy to convince people that the Chinese government actually has been quite
transparent. But in our view the difference between reality and media headlines
is always great when it comes to China; right now is no exception. So let us
run through what seem to me to be some basic facts.
First, we have past incidences of similar virus outbreaks to
consider: SARS (severe acute respiratory syndrome), MERS (Middle East
respiratory syndrome), bird flu and swine flu. The coronavirus is most often
compared with SARS. Our analysis suggests that the effect of SARS on markets
was limited. Global markets were already falling long before the SARS outbreak
and it is difficult to attribute how much of the fall was due to SARS and how
much was just the momentum of previous price declines. Second, that the
reaction by Chinese authorities has been swifter and more disciplined than
during SARS. Also, the Chinese health care system has improved in the nearly 20
years since SARS. Third, that lives are being lost to the disease but no more
perhaps—and potentially many fewer—than in past outbreaks. Some estimates of the
deaths attributable to the swine flu pandemic of 2009-2010 were over 280,000
Some companies are seeing sales and profits hit because they
have had to close down retail stores, or temporarily halt manufacturing
operations. These factors are going to hit quarterly and full-year profits. In
some cases, an entire year's worth of profits may be wiped out. These
developments are starting to be absorbed by investors, however, and so we
believe the market ought to be able
to look through short-term numbers and focus on the long term.
After all, valuations in Asian markets appear reasonable.
While Asia is not at rock-bottom valuations in price-to-earnings (P/E) terms,
it is in price-to-book (P/B) terms. In our view, this apparent contradiction is
due to the fact that policymakers in Asia have been happy to allow wages to
take a greater share of the economy. The effect of this is to reduce earnings—but
investors seem to focus only on the current earnings numbers and make the P/E
ratio look higher than it otherwise would be. Given that across much of the
rest of the world, governments have been squeezing wages to create higher
profit margins for corporations, the relative P/E ratios in Asia may actually
be cheaper than what is reflected in the market.
Sentiment also is undeniably weak. Weak sentiment due to
prolonged earnings stagnation was worsened by fears of a U.S.—China trade war,
which was exacerbated by the Hong Kong protests and then by the coronavirus.
Price declines are inevitable for some stocks. Current conditions seem rather
pessimistic and we believe that is normally a good time for the long-term
investor to buy.
The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.