Coronavirus: which impact for Emerging Markets?

The unexpected serious outbreak of the new Coronavirus has been hitting the front pages and headlines of all media and social media channels worldwide.

While our hearts and minds are with the victims of this tragedy and their families, and people globally worry about their health, also investors have been raising questions on what the impact could be on the financial markets, not least for emerging and Asian markets, and Chinese stocks in particular. The timing of the outbreak, with a massive migration of Chinese citizens across the country and abroad due to the Chinese NY holiday break, could not have been worse. Currently Asian markets are in clear risk-off mode, but the overall impact on Asian markets has probably not yet been fully felt as many markets have been closed for Chinese New Year, and have been opening up gradually this week with strong corrections. After the consecutive re-opening of Korea, Hong Kong, and Taiwan, stocks have been hit. But only when the local Chinese markets reopen next week, the full impact can be judged.

So what to expect for investors?

First, nobody knows if and when the virus spread will be under control.

What we can expect is that, due to the severe reaction and measures being taken in China, the short term impact on the economy will be very harsh, and growth numbers will most probably fall strongly for the first quarter(s?). So the ultimate impact on the economy, company results and markets will mainly be a consequence from the evolution of the infection and mortality rate in China and abroad, but also as much being a function from the reaction of and measures taken by the authorities and governments being taken in order to support their economies.

So, although it is currently impossible to give an estimate of the future evolution of the virus outbreak and potential impact, an indication of a potential market bottom could be provided by a slowdown of the growth of the additional new cases, as it was the case with SARS in 2003.

Looking at the past, this kind of market corrections resulting from an “external” and “black swan” type of event, has proven to be good entry points for longer term investors to pick up high quality names at oversold prices. The question always remains if this is also the case now and what would be the best timing, as nobody knows the size and timing of the correction.

As the saying goes in the financial world that “we should never catch a falling knife”, at least it would be advisable to wait until the most important and involved market, the local Chinese A-share market, re-opens next week. As this market is sensitive to the activity from a very large but less educated retail investor community, some panic-selling can be expected, which could flow over to other markets.

Time will tell and patience is rewarded. Success!

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