As coronavirus spreads across world, some investors turn bullish on China

Sunny Friend Environmental Technology

28/02/2020 06:00

By David Randall
    NEW YORK, Feb 28 (Reuters) - 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% year-to-date, while benchmarks in the United
States and Europe are down 7% or more over the same period. 
    U.S. stocks fell again on Thursday, with the S&P 500
dropping 4.4%, confirming a 10% drop from the most recent high
and signaling a correction. But China's CSI 300 index gained
0.3%. 
    Fund managers and analysts say the disparity in the stock
market performance reflects expectations that the impacts of the
virus are being contained in China, while the full extent of the
outbreak in developed markets such as the United States and
Europe remains unknown. Those fears are especially potent given
that major U.S. stock benchmarks were trading at all-time highs
within the last two weeks, helping fuel a more than 12% 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 United
States and China. The CSI 300 remains 0.3% below where it was
this time last year, while the U.S. benchmark S&P 500 is up 6.7%
over the same time. 
    "The  U.S.  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 already instituted quarantines in major cities and
suspended schools in hopes of containing 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, government officials
said.  urn:newsml:reuters.com:*:nL3N2AR0MR 
    "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 that could see a benefit from
the quarantines. 
    "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 to business spending and consumer confidence from
the coronavirus impact but expects economic activity will pick
up in the second half of the year as the benefits of the trade
deal between the United States and China accrue. Her fund is up
nearly 13.5% year-to-date. 
    Along with online education, she is focusing on companies in
the healthcare sector ranging from biotech to medical waste
disposal. The fund's third-largest holding is Taiwanese medical
waste disposal company Sunny Friend Environmental Technology Co
Ltd  8341.TW , according to Morningstar. Sunny Friend's shares
are up 6.6% this year. 
    Hsiao is also bullish on consumer companies that focus on
millennials, especially those that sell ready-to-make food and
condiments. 
    "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. 
 

 (Reporting by David Randall; Editing by Ira Iosebashvili and
Leslie Adler)
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))