Coronavirus: The known unknown

Caution is warranted until at least the middle of next month
Just when we thought Japan’s stock market was poised for big gains, we have encountered what can be best described as a ‘Black Swan” event. Although stock markets remained reasonably calm last week, we believe the full impact on sentiment from fears of the Coronasvirus has clearly yet to be felt. Although the airborne virus seems to be spreading far quicker than SARS did 17 years ago, moving quickly across China and now carried to other countries, the fatality rate thus far seems fairly low at below 5% level.

Come what may, the spread of this disease will cast a long shadow over global stock markets regardless of what happens elsewhere. Its negative impact on China’s consumption is already looking fairly severe with China-related plays in Japan likely to continue to be sold off along with inbound tourist names, not to mention, general travel and leisure plays. These will be areas where we will be looking for bargains sometime over the next month depending on how the events unfold.

The coming earnings season which we thought would usher in a strong rally in Japanese stocks is now unlikely to provide much upside support should the containment programs fail, especially in China. Although technology and automation names which we continue to like should remain relatively well supported should panic selling set in, we think investors would be wise to raise cash in the near term and wait to see how things pan out. 

As long as the virus remains in its current form and doesn’t mutate, there is still a good chance that it can be contained before fatalities grow exponentially. However, given that millions have already traveled across China and indeed to many other countries for the Chinese New Year, the full impact of the contagion will not be known until around mid-February at the earliest. This is now our time-line before possibly turning positive again on the market direction. We will thus keep this weekly publication brief as no other aspect of the market is of any importance or meaningful until fears of this contagion subside.