China’s mainland stockmarket just reopened for the first time since the coronavirus really hit the headlines. As expected, share prices collapsed. Early in the day, the market was down by 8%, which is the biggest hit since 2015 (which is when China caused a short-term global panic).
How did the Chinese government react? With a lot of money, of course. And that’s what we can expect from here on in.
The key for investors is not the virus, but market expectations
Like every other government in the world, China wants to keep financial markets rising and citizens in jobs. When citizens have jobs, it keeps them out of trouble. When financial markets are rising, they feel richer and thus more satisfied. And given that there’s a nasty epidemic hitting the country right now, China cares even more about making sure that nothing else goes badly wrong.
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Now, as I’ve pointed out – and as I’m sure you know – I know nothing about viruses and how they spread and while I’ll read about it, I can’t offer you any special insight. What I will say though is that from an investment point of view, it’s more about what’s being priced in. Has market panic grown rather too extreme, and therefore prone to being surprised on the upside, or are markets still too complacent?
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I think it’s clear that markets have shed the complacency now. We have a clear rush for safe havens, a clear rejection of China-related assets, and a lack of a sense of exuberance in the US, despite extremely solid results from both Apple and Amazon last week (I’m going to leave Tesla out of that “lack of exuberance” tag, because it’s a law unto itself).
So is fear over the coronavirus peaking? That’s less clear. We got the “magazine indicator” confirmation this week – The Economist had the coronavirus on the cover (just a reminder – the idea is that when a mainstream, large circulation news publication carries a story on the front page, that means it’s “in the price”).
However, I wouldn’t just pile into the market on a knee-jerk basis. Instead, a better bet is to look at whether any assets have actually been hit hard enough by this shock to be worth considering buying now.
Where to invest for a post-viral bounce
So if you’re looking at areas that might benefit from the market taking a step back and deciding that coronavirus won’t be quite as bad as expected, where should you be looking?
The assets and sectors that have been hit hardest are all of those that the market considers most vulnerable to any problems with Chinese economic growth.
Commodities are a very obvious one. As Bloomberg points out, China now accounts for just over half of the world's demand for base metals. That compares to just under a fifth during the Sars epidemic in 2003. In other words, China matters a lot more today. That said, commodities – unlike global equities thus far – have also seen a proper sell-off.
The S&P 500, for example, has erased its gains for the year. That sounds bad, but it amounts to a drop of less than 4%. The copper price, on the other hand, has suffered a double-digit drop since the middle of January. On Friday, the price of the orange metal fell for the 13th trading session in a row. That's a record according to Bloomberg (admittedly, the comparable data only goes back for about 30 years, but even so).
That’s quite extreme. And correspondingly, the big miners have seen their share prices tumble too. Back on 20 January, Rio Tinto had rallied back to nearly £46.80 a share after last year's mid-summer wobble. It’s now trading at just above £40. BHP Billiton has suffered a drop on a similar scale.
I’m not suggesting that you dive into these things as a quick trade, but if you’re long-term bullish on commodities (which have very much been the laggards in recent years in terms of asset classes), then this may represent a decent buying opportunity. Alternatively you could opt for one of the mining-focused investment trusts if you prefer broader exposure.
The oil majors have also taken quite a knock during the past month – again, not that surprising, given that oil has also experienced a nasty sell-off (and it was already pretty unpopular). So the likes of BP and Shell might also represent buying opportunities.
Could this get worse? Of course. We can’t predict the future. But at the same time, the Chinese government is making it very clear that – as with any other economic or financial crisis in recent history – the answer will be to print as much money as it takes to prop up its markets and industry.
History suggests that unless this epidemic is much worse than anything we’ve seen in the last 50 years, then the money printing will eventually offset the fear of the virus. At that point, the market could easily turn on the spot and decide that the reflation trade is back on.
So now looks like a reasonable point to get some exposure to that possibility, if you don’t have it already.
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