The traps and the opportunities: How to play equity markets in a global pandemic

Last week markets had their worst week since the global financial crisis (GFC) and the carnage, at least on the ASX, continued yesterday.

A virus that began at a live meat market in Wuhan has now spread to over 80,000 people globally and there are few if any places in the world unaffected.

Chinese businesses scaling back operations and travel restrictions were enough to draw this to the world’s attention.

But in the last week with the virus spreading even further and no longer traceable back to Wuhan, businesses in other parts of the world have followed suit, asking staff to work from home or take unpaid leave.

Deadly for humans, but how deadly for markets?

This is not the first deadly virus to shock China or the world, the SARS outbreak and Swine Flu hit last decade. The latter infected 1 billion people, 15 per cent of the population.

But as Betashares chief economist David Bassanese said yesterday, back then the markets remained focused on recovering from the GFC and the death rate was only 0.2 per cent.

The SARS death rate (10 per cent) was higher than the coronavirus. But at the time of the SARS outbreak in 2003 China was still hurtling along, booking double digit growth until the GFC hit in 2008.

Economists have made varying calls about just how bad the investor response to this latest outbreak has been, but arguably the best summation came from Nigel Green, the CEO of financial advisory deVere Group.

“Investors have done a ‘180’ – from a muted overly confident reaction to the serious and far-reaching global issue of coronavirus to running like headless chickens,” he said.

Investors retreat to the sidelines

As with any market downturn, the hope is that things will recover. All eyes will be on the Reserve Bank today with speculation it will cut interest rates again.

One small cap fund manager who spoke with Stockhead but did not want to be named said that while stimulus might work for liquidity it might not work for demand.

“There’s going to be stimulus, but one perspective is if the virus continues to become more prolific people will probably save rather than spend,” he said.

“It remains to be seen if it’s going to do anything for demand other than for short-term liquidity.”

ASX-listed players are riding out the storm until they head back to market for more cash.

Kogi Iron (ASX:KFE), a small cap that is aspiring to become the first integrated steel producer in Nigeria, still plans to go ahead with its $US8m capital raising but only when the market is more stable.

Managing director David Turvey told Stockhead yesterday investors just wanted markets to stabilise.

“We have a bit of time to be patient. We believe the investors we’re looking at want the dust to settle to realign portfolios,” he said.

“We’re going to be proceeding with this because we do have interested parties although they’re saying why would we do it now – its the last thing they would want to do.

“Of course it concerns the whole world market. This project is not immune but its relatively unique to where it is. Investors have their own reasons for selling. Where we are going is in a different space.”

The silver lining

So it’s clear that while some projects are being put on the backburner, they are not being cancelled.

And not all stocks are taking a beating — in fact, many are providing a lucrative opportunity for investors.

One example is Zoono (ASX:ZNO). The hand sanitiser maker has gone up 28 times in five months, with hot demand for its products, which last week the company said were shown to be effective in warding off the coronavirus.

A handful of other stocks are also going against the downward pull of global markets thanks to having their hand in helping fight the deadly coronavirus. Biotech giant CSL (ASX:CSL) is assisting the University of Queensland in developing a potential vaccine and it gained 2.3 per cent in February.

Another gainer was Uscom (ASX:UCM), which has a diagnostic for the treatment of very sick people. It more than doubled in February.

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Unfortunately though, the broader biotech sector has had a bad few weeks. The Biotech Daily Top 40 Index fell a total of 14 per cent in February.

Other companies that went on a run last year, such as nerve repairer Orthocell (ASX:OCC) and skin disorder treatment developer Clinuvel Pharmaceuticals (ASX:CUV), have fallen with neither good or bad news.

China heading back to work

The clearest indicator of China’s suffering is the plunge in the Caixin manufacturing PMI. It retreated from 51.1 in January to GFC levels of 40.3 in February.

But Bloomberg believes China is turning around, arguing that the economy wide operating rate rose to 60-70 per cent of the normal level — 20 percentage points higher than two weeks earlier.

“We expect the Caixin manufacturing PMI to rebound back to expansionary territory in March reflecting progress that China is making in restoring production,” economist David Qu said.

This may not do much to reassure people outside China worried about coronavirus in their own countries. But it will likely be a relief to companies, including ASX small caps, that do business with China.

Quick containment is key

One of the biggest hints to the equity market rout that was to come was China’s 10 per cent drop on the first trading day following the Lunar New Year Holiday.

The coronavirus spread globally could get worse before it gets better. But the key to the extent of the impact on markets will be whether or not global growth takes a beating.

Betashares’ Bassanese said there would only be a “short-term shock to growth with good prospects of some recovery in the second half of the year if the virus is able to be contained globally within three months or so”.

AMP’s Shane Oliver, who has observed all 23 US stock market falls of over 10 per cent in the last five decades, said the key was whether or not a US recession eventuated.

When it does, share market falls are longer and deeper. Oliver said the uncertainty suggested a greater than normal risk on this front, but that investors should not panic sell.

“Talk of billions wiped off share markets and warnings of disaster help sell copy and generate clicks and views,” he said.

“But we are rarely told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market.”

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