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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
‘I installed a heat pump in my home – here are five things I’ve learnt’From the size and noise of a heat pump to how much it costs to run one, Ruth Emery reveals what she’s learnt after installing one in her home six months ago
-
3 ways to work out if a stock is good valueThe only thing you can really control in investing is the price you pay for an asset – but how can you tell if you’re getting a good deal when it comes to the price of a stock?
-
Halifax: House price slump continues as prices slide for the sixth consecutive monthUK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
-
Pension savers turn to gold investmentsInvestors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
-
Where to find the best returns from student accommodationStudent accommodation can be a lucrative investment if you know where to look.
-
The world’s best bargain stocksSearching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
-
Revealed: the cheapest cities to own a home in BritainNew research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
-
UK recession: How to protect your portfolioAs the UK recession is confirmed, we look at ways to protect your wealth.
-
Buy-to-let returns fall 59% amid higher mortgage ratesBuy-to-let returns are slumping as the cost of borrowing spirals.
