Update: We’ve published updated thoughts on the Wuhan virus. Check it out here.
Happy CNY to all Patrons！在这个新的一年，祝您身体健康，百病不侵！
Now one of the most popular topics requested from Patrons was for my take on the Wuhan Virus.
It’s something that’s been on my mind all week as well, so I wanted to share my thoughts here for you guys. I’ll do a further article on Financial Horse in the coming days, but here are my preliminary thoughts for now.
There are 2 ways this can play out:
1. China successfully contains the virus with its current slew of drastic measures. The economic slowdown is short lived (limited to no more than 3 to 6 months), and the current sell-off proves to be a buying opportunity.
2. China fails to contain the virus with its current measures. The spread worsens, as does the economic slowdown (6 to 12 months or more). If so, the current buying opportunity is too early to buy in, and the correct buy-in lies further in the future.
Of course, in both situations I’m assuming the virus will eventually get under control (the only uncertainty is as to the timing). I think this is a fairly reasonable assumption, mankind has always proven to be fairly resilient when the going gets real. The alternative, is a global pandemic of the likes we haven’t seen since the Spanish Flu 100 years ago (in that scenario all bets are off – only cash or gold will be viable plays), and for now at least, I think that possibility is slim.
Now let’s recap what we know about the virus:
1. The virus is incredibly contagious – more so than normal flu, and roughly on the same level as SARS
2. It has an incubation of up to 14 days, and transmission is possible even without symptoms
3. There are around 3000 reported cases and 80 deaths globally (actual number in Hubei is likely underreported)
4. China has placed Hubei essentially under quarantine
5. All other cities in China are in major lockdown (large events cancelled, mask wearing mandatory) to severely restrict the spread of the disease
The big question here then – Will the measures being taken be sufficient to stem the spread of the virus, such that we have Scenario 1 instead of Scenario 2?
Nobody knows the answer to that of course. My preliminary take for now, subject to any new information (which changes by the hour), is that Scenario 1 is more likely given how drastic the measures Beijing is taking.
JP Morgan apparently has a similar take on this – so do check that out if you’re interested https://www.zerohedge.com/markets/jpmorgan-please-buy-dip
If this is so, the current sell-off will prove to be a good buying opportunity in the coming weeks or months (timing will depend on how the news plays out and the price action).
What are good buys to pick up?
Names that are likely to be oversold in the short term are Hospitality related plays – Hotels, Airlines, Tour providers, OTAs etc. It’s basically the SARS playbook, but adapted for a tech heavy world.
Interestingly enough, yesterday’s US trading saw heavy sell-offs in the tech space as well (names like Alibaba), when technically they should not be as affected as the pure hospitality names. If this continues, those could prove to be great buying opportunities as well.
China REITs look interesting too. CRCT sold off 3.5% this morning and is now at a 6.5% yield. MNACT is down 4.8% to a 5.2% yield.
China A shares trading is under extended trading close due to the extended CNY break in China, so we won’t get price action signals from there at least for a while.
Hong Kong on the other hand, opens for trading tomorrow, and that’ll be a really interesting one to watch for price action signals.
I’ll share further thoughts on this on Patron in the coming days, as well as a list of counters I am interested in, as the news (and trading) plays out. Stay tuned, and feel free to share any thoughts below!
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