Why some investors are turning bullish on China

Analysts are hoping that China has managed to control the virus and are especially bullish about certain sectors such as online education. (AP)
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Updated 29 February 2020

Why some investors are turning bullish on China

NEW YORK: China’s stocks were among the first hit by fears of the coronavirus outbreak. Some investors are now betting they may be among the first to recover.

The two major benchmarks for stocks traded within China are down less than 1.9 percent year-to-date, while benchmarks in the US and Europe are down 7 percent or more over the same period.

Fund managers and analysts say the disparity in the stock market performance reflects expectations that the impact of the virus is being contained in China, while the full extent of the outbreak in the US and Europe remains unknown. Those fears are especially potent given that major US stock benchmarks were trading at all-time highs within the past two weeks, helping fuel a more than 12 percent decline in the S&P 500 since Feb. 19.

Chinese stocks, by comparison, had been battered for months by concerns over the impact of the trade war between the US and China. The CSI 300 remains 0.3 percent below where it was this time last year, while the US benchmark S&P 500 is up 6.7 percent over the same time.

The market was looking for a reason to sell and coronavirus is a pretty significant reason, given its potential to disrupt consumer spending and global supply chains, said Aditya Kapoor, a portfolio manager of the $1.9 billion Ivy Emerging Markets Fund.

China has instituted quarantines in major cities and suspended schools to contain the virus. The number of new deaths in mainland China due to the virus stood at 29 on Wednesday, the lowest number since Jan. 28, officials said.

“We’re expecting very poor results in most of our companies over the first and second quarter, but our working assumption is that China has it under control,” said Kapoor.

The stocks he is bullish on include cloud-based software and after-school education companies. “When schools are closed nationwide the only option to study is online, so these companies are getting a huge boost without spending the marketing dollars required because everyone is giving them a trial,” he said.

Tiffany Hsiao, portfolio manager of the $127 million Matthews China Small Companies fund, said she expects a temporary hit from the virus but expects economic activity will pick up as the benefits of the trade deal between the US and China accrue. Her fund is up nearly 13.5 percent year-to-date.

Along with online education, she is focusing on companies in the health care sector ranging from biotech to medical waste disposal. The fund’s third-largest holding is Taiwanese medical waste disposal company Sunny Friend Environmental Technology, according to Morningstar. Sunny Friend’s shares are up 6.6 percent this year.

Hsiao is also bullish on consumer companies that focus on millennials, especially those that sell ready-to-make food.

“The interesting thing about millennials in China is that a lot of them don’t know how to cook,” she said. “With coronavirus many are quarantined at home and need to make food for themselves.”

Hsiao said she is prepared to increase her positions in Chinese stocks if they follow developed markets lower.

“We are long-term investors and we see any market disruptions as opportunity to add to positions that we have convictions in,” she said. 


S&P cuts Australia’s sovereign outlook, affirms AAA rating

Updated 08 April 2020

S&P cuts Australia’s sovereign outlook, affirms AAA rating

  • S&P affirmed Australia’s prized rating but said a downgrade was possible within the next two years
  • Australian long-dated bonds sold off after S&P’s outlook downgrade

SYDNEY: Global ratings agency S&P on Wednesday lowered its outlook on Australia’s coveted ‘AAA’ rating to “negative” from “stable” in anticipation of a “material” weakening in the government’s debt position as it splashes out a large fiscal stimulus package.
S&P affirmed Australia’s prized rating but said a downgrade was possible within the next two years if the economic damage from the COVID-19 outbreak is more severe or prolonged than it currently expects.
Australia is among a handful of countries in the world to boast the best ranking from all three major ratings agencies.
But it has come under a cloud as the pandemic has dealt Australia a severe economic and fiscal shock, with S&P predicting the A$2 trillion ($1.23 trillion) economy would plunge into recession for the first time in nearly 30 years.
This would cause a “substantial deterioration of the government’s fiscal headroom at the ‘AAA’ rating level,” S&P said in a statement.
Treasurer Josh Frydenberg said the outlook downgrade was “a reminder of the importance of maintaining our commitment to medium term fiscal sustainability.”
The government has pledged A$320 billion ($197.73 billion) in fiscal spending, or 16.4 percent of annual economic output, to backstop the economy and prevent a crisis as the pandemic shuts companies and leaves many unemployed.
Some fund managers said Wednesday’s outlook downgrade was unlikely to raise the government’s borrowing costs by much though it could hurt Australian companies whose ratings are dependent on the sovereign rating.
“A large proportion of credit funds are mandated to maintain funds in a specific ratings bucket,” said Asmita Kulkarni, Director Investment Strategy at FIIG.
“With potential widespread downgrades we could see funds being forced to sell-down investment which would result in a widening of credit spreads.”
Australian long-dated bonds sold off after S&P’s outlook downgrade with 10-year yields jumping to 0.967 percent from 0.909 percent at Tuesday’s close.
Economists said they do not expect a rating downgrade prior to the federal budget due on Oct. 6.
It was only in September 2018 that S&P upgraded Australia’s outlook to “stable” from “negative” as the budget came close to balance. The government had even projected a surplus for the current fiscal year and next.
While all those predictions are now under water, Australia’s public debt is still in good shape, S&P noted.
“While fiscal stimulus measures will soften the blow presented by the COVID-19 outbreak and weigh heavily on public finances in the immediate future, they won’t structurally weaken Australia’s fiscal position,” S&P said.
“This expected improvement is a key supporting factor of our ‘AAA’ rating.”