04 February 2020
A new decade brings with it a new disease. The novel coronavirus has spread quickly from its origins in central China, infecting tens of thousands of people and triggering city-wide shutdowns and quarantine measures.
Markets respond to liquidity injection
Markets initially sold off in response to the outbreak, with sectors such as airlines, tourism and commodities among the hardest hit when the Lunar New Year holiday ended. But the Chinese market has since partially rebounded thanks to swift, preemptive government action: a 10-basis point repo rate cut and an additional liquidity injection of 500 billion yuan ($71bn), on top of 1.2 trillion ($170bn) that the authorities made available on Monday.
Sectors such as online companies have actually benefited as more people stay at home. Smaller companies working on vaccines have seen their prices treble, despite the fact it can take six to 12 months to produce a viable product. Government bond prices, meanwhile, have risen in a perceived flight to safety and amid more accommodative monetary policy.
Onshore China investors remain more nervous than offshore, as they are feeling a more immediate impact, monitoring daily infection reports and coping with travel restrictions. Small and medium-sized companies are finding it easier to borrow from local banks - to keep paying staff and bills - thanks to government intervention, but we expect more targeted tax cuts and stimulus to follow.
Limited comparison with SARS
It remains hard to assess the longer-term impact on China and the global economy. The most obvious comparison is with the SARS virus in 2003, but that has limitations. First, the number of infected people is far higher than during the SARS outbreak, while the mortality rate so far appears to be lower. Second, the SARS virus quickly made people feel unwell, prompting them to seek help. People with the coronavirus can often be asymptomatic for up to five days, allowing them to infect others unintentionally. Finally, SARS disappeared as soon as the weather improved, but it is too soon to tell if that will happen this time.
So far, global markets appear to believe new cases of infection will decline, and even that this outbreak will be shorter-lived than SARS thanks to government measures; though there will be an impact on Q1 GDP growth. However, it is possible that the spread is far wider than has been reported. Last year, around 160m Chinese travelled while it was closer to 20-30m prior to the SARS outbreak. Trade between China and Africa has also increased dramatically since SARS, meaning there could well be cases on that continent that have yet to be identified due to a lack of diagnostic kits.
Impact on earnings
While we believe there could be an impact on global earnings from lost business activity in China due to the virus, there has been no significant overreaction in global markets that would prompt a big change in our portfolios at this stage.
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.
ED20 - 024