The Sars outbreak of 2003 taught Asian investors that when the disease passes, there are profits to be made. So for many, the coronavirus scourge is seen as cause to reposition funds in expectation of a rebound.
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But which sectors and stocks can be expected to come back the strongest? There are some obvious candidates: the share prices of airlines, restaurant chains and businesses that require people to be in proximity have been hit particularly hard as cities and factories have been shut down.
If the Sars epidemic is any guide, the valuations of companies in these sectors should bounce back once the crisis is over. Cathay Pacific's share price, for example, nearly doubled between its 2003 nadir and its peak in mid-2004 — by which time most people were confident that the virus had been beaten.
But other industries are much harder to call. One approach is to look at those that were showing signs of a cyclical rebound just before the crisis hit and back them to resume it once the coronavirus — which has killed more than 1,000 people — loses its vigour.
Semiconductor manufacturers in Asia are one such sector, according to Steven Holden, founder of Copley Fund Research, which tracks the investment decisions of 223 emerging market funds with a combined US$450 billion ($696b) under management.
Holden's data show that these funds had built up record overweight holdings in semiconductor stocks by the end of 2019. On average they had 7.33 per cent of their total holdings in such stocks on December 31, about three weeks before the extent of the epidemic became clear.
Following the news of virus's impact, their average position slipped back to 7.15 per cent of total holdings but remained at a strong 0.91 percentage point overweight relative to the MSCI emerging markets benchmark index.
The most strongly bought chip companies were SK Hynix, the South Korean memory chip supplier, and three from Taiwan: TSMC, the semiconductor foundry; MediaTek, which supplies chips to wireless communications manufacturers; and Win Semiconductors, a foundry services company.
"Emerging market managers are positioned at record overweight ranges in semiconductor stocks after a surge in buying activity over the six months to January," Holden said.
"After an initial shock following the coronavirus outbreak, stocks such as TSMC and SK Hynix appear well supported as concerns over supply and demand disruptions from China are shrugged off."
The investment case for these specialist technology stocks has been encouraged by upbeat remarks by Asian chipmakers, which have named the rollout of 5G telecoms in China and elsewhere as a key driver behind projected earnings in 2020. A cyclical rebound in other segments of the chip industry have also emerged to attract interest.
Reinforcing interest in 5G, China Asset Management — a leading mainland fund — reported that assets in a 5G-focused exchange traded fund it launched last October surged in early February to surpass Rmb10b ($2.2b) last week.
Investors regard 5G telecoms, which will usher in a new era of superfast connectivity, as a relatively reliable trend to follow. By the end of last year, pushed by strong backing from Beijing, some 86,000 5G base stations had been installed in 50 cities — a stronger showing than any other country.
Some other sectors that could be in line for a rebound are construction, carmakers and electronics companies in China, in the view of Arthur Kroeber, head of research at Gavekal, a Hong Kong-based financial services firm. "Our basic story about China's economy in 2019 was that surprisingly strong construction activity offset recessions in cars and electronics," said Kroeber.
"And our pre-coronavirus story for 2020 was that slower construction activity would be offset by a modest recovery in the two key manufactured goods categories — autos and electronics," he added. "All three have decent rebound capacity."
The harder question to answer is when that bounceback will come, and just how far activity will fall beforehand. Grim data points are easy to find. In the first week of February, for instance, new apartment sales dropped 90 per cent from the same period in 2019, according to preliminary data on 36 cities compiled by China Merchants Securities.
Such numbers reinforce a growing sense that China's overall GDP performance in the first quarter of this year may shock even the pessimists. Kroeber said that in some sectors the fallout could be "horrific", given the disruption to China's vast manufacturing base sustained by the shortage of workers who are unable or unwilling to return to work.
"Substantial double-digit declines in many production-side economic indicators might be expected over the first three months of the year," he added. Rebound stocks may present themselves, but calling the bottom will be tough.
Written by: James Kynge
© Financial Times