For all the doom and gloom over the coronavirus, mortality rates are low. And in the next few weeks we should hit the peak infection rate and the public health experts will then start to get a handle on it. The bad news, however, is that in my opinion the effect on the economy of China and Asia has been hugely underestimated – and the share prices of regional funds have yet to factor this in.
Many analysts have downgraded their forecasts for Chinese growth to reflect the shock from the outbreak. Barclays has cut its 2020 GDP growth estimate by 0.4% to 5.4%; for the first quarter it expects growth of 4% year-on-year, a 1.8% reduction from its previous estimate. It also thinks that the outbreak “poses significant risks to growth” in emerging Asian countries, “with Thailand and Singapore among the most vulnerable”.
Counting the cost
According to risk consultants at CheckRisk, Sars cost the global economy between $35bn and $40bn. But the coronavirus, because it is much more infectious,“will cost a lot more”. They reckon that if the virus spreads to over 100,000 people then it could cost $400bn for China alone. The government in China has already set aside $175bn so far in liquidity to manage the crisis and protect the yuan, but my guess is that this won’t be nearly enough.
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We’re already starting to see the knock-on effect on supply chains. CheckRisk reckons that global GDP growth in the first quarter could fall to just 0.5% as a result of the virus, while Chinese GDP growth could go negative in the first quarter.
What seems to reassure investors is the notion that the Chinese central bank, the People’s Bank of China (PBOC) will do all it can to back the economy as it inevitably rebounds. This seems highly credible in the medium term. CrossBorder Capital is a London-based research firm that charts global liquidity flows, especially from central banks. It suggests that the PBOC’s liquidity injections have accelerated since the lunar new year period in response to the coronavirus crisis. It says these actions reinforce existing trends that coincided with the signing of the trade agreement in January and the lunar new year.
According to CrossBorder Capital, in late 2019 economic growth was at a 29-year low, so easing was already on the cards. But this huge liquidity injection will take its time to work through the system and in the meantime there is likely to be a nasty downturn. This crisis has been a boon for home-delivery, movie-streaming and health-waste disposal firms. But for everyone else, it’s been a nightmare.
The funds set to bounce back
Not that you’d guess this from the share price of the main investment trusts that invest in China, Greater China and Asia Pacific generally. In many cases the share prices are actually showing positive returns year to date. Oddly, the biggest falls have been seen in funds that invest in nearby countries. Many Vietnam funds have seen falls of as much as 5%.
None of this makes sense. The effect on China will be huge and the monetary easing won’t be enough to dig the national economy out of its hole in the next quarter. I think we need to see price declines of between 5% and 10% before the market has fully priced in the likely short-term effects. We might also see discounts to net asset value (NAV) start to widen from their current 5%-10% range and become closer to 15%.
But the good news is that once the market has properly priced in these losses, investors will rediscover these trusts, especially as all that central bank largesse starts to kick in. I think Invesco Asia (LSE: IAT), Schroder Asian Total Return (LSE: ATR), Schroder Asia Pacific (LSE: SDP) and Scottish Oriental Smaller Companies (LSE: SST) will disproportionately benefit as the quality plays in this sector.
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