Investors are backing factory automation stocks, rate-sensitive sectors and China Internet and logistics companies in a defensive market as the coronavirus wreaks havoc with travel schedules, trade movements and supply chains.
The virus outbreak has forced office and shop closures, travel cancellations and lockdowns of entire cities as authorities impose strict quarantine regulations to minimize human interaction and check its spread. The epidemic has killed more people than the SARS outbreak of 2002-03 and is showing no signs of slowing. The death toll stands at 910 with infected cases crossing the 40,000 mark.
As more people stayed indoors and cities restrict human interaction, e-commerce and Internet-based businesses are seen to be thriving.
“Within equities, we focus on global names, especially US and international secular growth ideas which are less affected by the coronavirus situation ‐ software or ‘new economy’ segments, such as cloud, networking, e-commerce that provide essential backup and services to the stay-at-home population, and have reported strong numbers in this earnings season,” said Andy Wong, senior investment manager at Pictet Asset Management.
Life in a lockdown
Indeed, with numerous cities are in lockdown, the Chinese New Year holidays have been extended and restrictions have been imposed on people’s movements. This has meant that very few businesses have been able to run normally and fewer still have raised business volumes.
“The internet companies overall should see acceleration in orders from the continued shift from offline to online, especially with online gaming, short-form video, e-commerce, food delivery, e-grocery,” said David Dai, of Sanford C Bernstein, in a note which backed long positions in shares of Tencent, Alibaba, JD.com, ZTO and Meituan as part of this theme.
He also said the outbreak would also be positive for the delivery sector, as the fear of going out would force consumers to shift from physical stores to online shopping and generate more parcels.
“The major express delivery companies are now busy gathering a delivery workforce to take care of the expected parcel surge after the Chinese New Year holidays. Even if the epidemic dies down, the demand will likely continue as the fear of going out will likely linger in the aftermath,” he said.
This has also brought about a change in peoples’ lifestyles, which some sectors will be able to capitalize on.
“This episode highlights and accelerates the shifting trend to the ‘new economy’, both to kill time and to stay productive. As the population turns to online shopping, social media, streaming content, as well as enterprises using work from home solutions, automated manufacturing, etc, proper infrastructure is needed to support these activities,” Pictet’s Wong said.
This will give more legs to China’s growth in the entertainment and media business. A study by PricewaterhouseCoopers said that China is on target to exceed that of the US for the first time by 2023. In the period 2019-2023, the US will add $71 billion (a 2.5% compound annual growth rate), while China will add $84 billion (a 7.7% CAGR).
The pace could quicken in the present environment.
“Online entertainment clearly increased as people stayed home. Gaming, especially the top two games (Tencent’s Honor of Kings and Peacekeeper), has seen an accelerated user base and downloads after Chinese New Year. Smaller games also accelerated but not as significantly. Short-form video (Xigua, Kuaishou, Douyin) users surged, thanks to successful Chinese New Year promotions and ByteDance’s opportunistic purchase of ‘Lost in Russia’,” Dai said.
The numbers are already reflecting this pickup in online activity both in entertainment and news consumption.
“Our analysis on third-party latest weekly data ended on February 2 reaffirms our channel checks on increased user activities in online entertainment across mobile games (Tencent), video (iQIYI), as well as live streaming and others (Bilibili) while search (Baidu) and news consumption (Weibo) are also seeing an uptake. Within mobile games, socially phenomenal genres are key beneficiaries,” they said in a note.
PBOC assurances
The central bank’s actions are also triggering investment ideas. The People’s Bank of China has already said the impact from the epidemic on China’s economy will be limited and temporary, but pledged “reasonable and abundant liquidity” for the banking system.
“If the virus situation continues, the sectors that will benefit are REITS [real estate investment trusts] as there will be more rate cuts ahead, online learning and home entertainment as consumers will spend more time at home,” said Eric Sim, a chartered financial analyst and former top investment bank director turned educator.
As equity REITs distribute most of their earnings, their comparatively high dividend yields become more appealing when the yields of safe assets fall. The recent pullback in government bond yields are making REITs attractive to investors again.
And while World Health Organisation officials said at the weekend that the number of infections being reported on a daily basis in China is “stabilizing”, there are opportunities in those firms which have an early advantage.
Japanese investment bank Nomura said its main scenario is for the situation to return to normal in April-June, when production will be boosted to make up for the February-March period.
“If we assume that the situation will eventually return to normal, we think it is a good opportunity to invest in Keyence, SMC, and other blue-chip stocks with high margins among factory automation companies, for which demand appeared to bottom prior to the Chinese New Year,” it said in a note.