Coronavirus outbreak turns out to be the black swan which significantly drags down Hong Kong stock market. Looking back at the market performance during SARS in 2003, we believe HSI has yet to reach its bottom currently. We expect a weak trajectory in February and suggest investors to reduce sector directly hit by coronavirus and cyclical stocks. Wait till panic sell-off sets in to purchase quality stocks.
- A black swan event after all good news are out. In January the market first experienced a rise and followed by a slump. The first half of January was supported by the first stage of China-US trade deal, but the Wuhan coronavirus spread has encumbered HSI notably with an accumulated fall of 9.8% in seven trading days. The outbreak of Wuhan coronavirus is similar to SARS in 2013 yet with higher spreading rate but lower fatality rate so far.
- Forecast based on SARS history. On the time front, the market is likely to reach its trough in Mar or Apr. During the SARS outbreak Hong Kong stock market bottomed out a month before the epidemic started to stabilize. At this stage there is no consensus among medical professions on when the Wuhan coronavirus outbreak will reach its peak. A conservative estimate would be Apr, implying HSI could hit the bottom as soon as Mar, serving as an early indication of coronavirus containment. In terms of magnitude, HSI fell 18.7% in total during SARS but merely 9.8% since the outbreak of Wuhan coronavirus.
- Market not enough panic. A sinking market triggered by major bad news usually bottoms out amid panic. However, the market showed no significant increase in turnover nor panic sell-off in current. VHSI rose to above 23, yet still below the peaks in last two years which ranged from 26-30. This implies there is not enough panic in the market to signal an absolute bottom.
- Investment strategy: Reduce sectors directly hit by coronavirus and cyclical stocks, avoid bottoming fish too early. It is more reasonable to stay prudent at present and reduce stocks, especially sectors directly hit by coronavirus, such as airline, travel, hotel, gaming, retail, catering and movie, and cyclical stocks that are volatile, such as property, brokerage, basic metals and automobile. Meanwhile, investors may switch to defensive stocks like utilities. In the mid to long run, before the outbreak reaches its peak and when the market shows panic, it will be the opportunity to purchase good quality shares. Investors may then focus on sectors with high profit growth and visibility or sectors with policy support.
- Sector implications: In general, consumption, technology hardware and equipment, brokerage and automobile face hardest hit from coronavirus; healthcare, online games and videos, online education may benefit; banking, utilities and capital goods are more defensive choices.
