Why some investors are turning bullish on China

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

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.