FEATURE
A China Expert Explains Why Coronavirus Fears Are Overblown
Brendan AhernCOURTESY KRANESHARES
When Krane Funds Advisors, manager of China-focused ETFs, hosted a four-day trip to Beijing and Shanghai this past October, the two dozen institutional investors in attendance had plenty of questions and the usual concerns—the ongoing trade dispute, ghost cities, debt levels, a slowing economy. “There were investors who felt the equity market was looking for an excuse to crash,” said Brendan Ahern, KFA’s chief investment officer and a frequent visitor to China. “But no one knew what it would be.”
Now we know: The rapid spread of a new coronavirus has sent the MSCI China All Shares Index down nearly 7% and the Standard & Poor’s 500 down 12% in the week ended Friday.
Ahern, however, isn’t worried about the epidemic’s effect on the global economy: “It’s getting blown out of proportion,” he says. “From my perspective, this is getting absurd.” He quickly recounts a litany of events that initially sent shockwaves through the market only to rebound within a matter of a few months’ time—9/11, Enron’s accounting scandal, and, of course, severe acute respiratory syndrome, better known as SARS, another pandemic.
Ahern began his career at Barclays Global Advisors, the originators of the iShares line of exchange-traded funds, now owned by BlackRock. He joined KFA founder Jonathan Krane, a veteran of Chinese startup ventures, when Krane was starting up in 2012. The firm—in which China International Capital Corporation, a Bejing-based investment bank, now has a majority stake—offers 16 China ETFs with $4 billion in assets. Its largest is the $2.7 billion KraneShares CSI China Internet ETF (ticker: KWEB) which returned 29% in 2019. Its $590 million KraneShares Bosera MSCI China A–Share ETF (KBA) owns companies listed on the Shanghai and Shenzhen Stock Exchanges (A-shares) in mainland China.
Barron’s spoke with Ahern about relevant SARS lessons, a range of base-case scenarios and several crisis-borne opportunities for the iron-stomached. An edited version of our conversation follows.
Barron’s: Help us put coronavirus in context. What are the scary headlines overlooking?
Ahern: The coronavirus is disproportionately affecting a very specific demographic—the elderly with pre-existing health conditions. (As was the case of death in Washington state). According to a recent report from China’s National Health Commission, about 80% of the people who have died from the virus in China were over the age of 60, and 75% had pre-existing conditions. Another contributing factor is China’s higher smoking rate. A respiratory ailment for a lifelong smoker is going to be highly problematic.
How does the coronavirus pandemic compare to the SARS outbreak in 2003?
China’s economic data and markets fell precipitously in response to SARS, though it rebounded very quickly. Stock markets stabilized once the number of SARS cases plateaued, similar to what is occurring in China right now outside of Hubei province. While China has a much larger impact on the global economy today than it did during the SARS epidemic, the Chinese government’s response to the coronavirus has been significantly stronger. Fiscal and monetary support from the government is occurring in order to allow China to maintain its growth trajectory. Foreign investors underestimate China’s determination and ability to meet its 2020 economic goals.
What’s the best-case outlook?
China and the U.S. took strong measures to contain the spread of coronavirus once it arose. Surprisingly, many other countries did not take such measures, leading to a rise in coronavirus cases outside of China. However, this rise has been small thus far, and more importantly, the level of medical attention in developed countries should help mitigate the overall effect.
There are huge sums of money being deployed to find a vaccine, and relative to other illnesses, the coronavirus’ mortality rate is low. Johns Hopkins shows that the flu kills 12,000 to 61,000 people in the U.S. per year, while the coronavirus has caused about 2,600 deaths worldwide. More people die from car accidents in a day than the entire number of deaths caused by the coronavirus thus far.
And the worst-case?
As the trade war showed, China plays a critical role in global supply chains.
The extension of Chinese New Year will have a significant effect on February economic data. [The Chinese government extended the holiday by four days in an effort to reduce mass gatherings and limit the spread of the virus, resulting in reduced corporate and consumer purchases.]
State-owned enterprises are telling people they have to go back to work, private entities are starting to follow. We get migrant-labor-tracking data, from phones, daily; this data shows people are going back to work. There is always a seasonal adjustment for January/February, factoring in Chinese New Year. Usually within a week after the holiday, the labor force returns to 100%. However, this year, the one-week-later number was 25%, so obviously, with the holiday being extended and people being cautious, that is way down. As of Wednesday that number was 72%. Home sales are even picking up. That said, transportation data, road, rail, airlines, those levels are way, way off. Travel and travel-related industries such as hotels, restaurants, and global luxury are apt to be adversely affected by efforts to limit the spread of coronavirus.
So where are the opportunities?
The healthcare and internet sectors look to be beneficiaries in the short run. If you were at home all day in China, what would you be doing? For patients with non-corona conditions, rather than risk going to the hospital, you would want to schedule appointments through healthcare apps such as Alibaba Health (ALBHF) and PingAn ’s “Good Doctor” (PNGAY).
If you were afraid of getting sick, you would stock up on pain medicine and decongestants. Traditional Chinese medicine is very popular, so you would buy over-the-counter products such as China Resources ’ “999 Cold Remedy” (CRHKY) and TongRenTang’s liquid herbal formulas (SHA: 600085). You might get bored while you are sitting at home. In terms of entertainment, you would download videos, music, and movies from services like Tencent (700.HongKong) and iQiyi (IQ).
You would still need to eat, so you would order restaurant delivery and grocery supplies using companies like Meituan Dianping (MPNGF) delivery services.
Your children would want to play video games, although parents might have them study instead via online education companies like TAL Education (TAL).
China’s A shares, which are traded on the mainland, rose 33% in 2019, but since mid-January (when the outbreak surfaced) have been affected less than Chinese companies listed in Hong Kong or elsewhere. Why is that?
Mainland Chinese A-shares were one of the top performing equity markets globally last year. They actually outperformed the S&P 500. Chinese investors are actively buying A shares: Tuesday Jan. 25 was the highest volume day for Mainland Chinese stocks since July 2015. Why are these investors buying? They recognize China’s policy response is occurring.
Since mid-January, KBA is down 3% vs. 5% loss for MSCI’s broader China index. The Mainland healthcare sector has proven particularly resilient.
What are the first data points that could indicate stocks are recovering from the virus?
Equity markets rebounded during SARS when the number of cases plateaued. Outside of Hubei province, that is beginning to occur in China.
KFA had an event scheduled in China for May. Will it take place?
No. While I do not expect to still be talking about this in May, the fact remains that trying to put this together right now is not realistic. But we will do another investor trip in the fall. That’s happening.
Thanks, Brendan.
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