By Sunny Oh
The whirlwind selloff in global stock markets has left the epicenter of the coronavirus mostly unscathed as Chinese equity exchanges have stayed shuttered this week.
But analysts expect Chinese equities to catch up with swooning stocks in Asia and the U.S. when their local bourses resume business on Feb. 3, as local traders return back to their desks from the Lunar New Year holiday. A plunge in Chinese equities could spur another vicious round of selling in global stocks amid worries that the global economic rebound expected this year may fall flat due to the viral outbreak.
“Financial markets, in Asia in particular, have reacted negatively to news reports of the virus spreading in recent days,” wrote Mark Haefele, global chief investment officer for UBS Wealth Management. “Chinese equities may suffer further declines when they re-open after the Lunar New Year holiday.”
The number of confirmed cases of the virus has risen close to 10,000, and 213 deaths have been reported, according to Beijing. A host of countries, including the U.S. and Japan, have advised against travel to China, while American Airlines, Inc. /zigman2/quotes/209207041/composite AAL +7.09% and Delta Air lines, Inc. /zigman2/quotes/200327741/composite DAL +5.55% said their U.S. to China-bound flights will be temporarily suspended.
In addition, the coronavirus’ spread is expected to hurt the Chinese services sector, which has seen its share of the overall economic pie increase as Beijing reorients its economy toward more domestic-focused industries.
“The near-term economic impact appears substantial. In addition to disruptions to production, avoidance of face-to-face contact may have resulted in a sharp fall in service activity,” said economists at Standard Chartered in a Friday note.
Meanwhile, some Exchange-Traded Funds have continued trading throughout this week, potentially providing a glimpse into the coming action. Mainland Chinese equity markets have been closed since Jan. 24.
The Xtrackers Harvest CSI 300 China Index ETF /zigman2/quotes/205950053/composite ASHR +1.67% , which tracks the biggest stocks listed in Shanghai and Shenzhen exchanges, fell nearly 8% this week and is on track for an almost 11% loss this year.
This may suggest a steep drop awaits companies underpinning the CSI 300 index /zigman2/quotes/210598128/delayed XX:000300 +1.02% , which already are trading at a 2.3% loss for the year.
Other Asian markets that reopened earlier from the New Year holiday took a beating. The Taiwan TAIEX index /zigman2/quotes/210597977/delayed TW:Y9999 +1.89% slumped more than 5% in the last two days after their markets restarted trading on Thursday.
In the U.S., the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +2.68% was on pace for a more than 2% drop this week, which would mark its biggest weekly loss since August and push the blue-chip index into the red for the year.
Yet, those bullish on emerging markets and Chinese equities have indicated that any selloff is likely to be a knee-jerk response, and could present a chance to buy stocks on the cheap for those steely enough to withstand the expected market decline.
“Given the valuation differential between U.S. and Chinese markets, the dip in Chinese stocks spurred by the outbreak may provide an opportunity to capitalize on a meaningful discount in equity markets in China,” said Brendan Ahern, chief investment officer of KraneShares, a provider of exchange-traded funds specializing in Chinese stocks.
He pointed out the price to earnings ratio for Shanghai Composite /zigman2/quotes/210598127/delayed CN:SHCOMP +0.77% constituents stood at 14.17 as of Jan. 30, versus the S&P 500’s /zigman2/quotes/210599714/realtime SPX +3.06% ratio of 21.96.