COVID-19 has infected over one million people worldwide. Although in Mainland China newly confirmed cases have dropped significantly since late-Feb, the pandemic and global demand slowdown are hurting China's economy. We analyse the impact on economy, stock market and various industries, and discuss the potential directions stock markets may go and which sectors could outperform.
- Supply side recovery – structural differences. We believe work resumption rate in China approached 80% nationwide at the end of Mar 2020. However, production capacity resumption likely lagged behind, due to COVID-19 prevention measures applied in the workplace, and slack new orders both in domestic and international markets. Pace of recovery varies by industry, geography and firm size.
- Demand stagnant to have longer-run impact. COVID-19 has put consumers in hibernation. Some of the demand may be lost forever due to consumer habit shifts and shrinking wealth effect. Unemployment rate is likely to rise in the process of economy slowdown and possible market clearing.
- Export hurt by global slowdown. As downturn in manufacturing production has deepened outside of China. Export orders continued to decrease in China. We found that computer, telecom, electronic and electrical equipment sectors are among the most vulnerable to short-term global demand disturbance.
- Expect broader policy support in larger scale. Policy supports, including fiscal and monetary, so far have mainly focused on providing instant relief to fight against COVID-19. When the nation comes back to work again, we think policy boost will extend much more broadly and in a larger scale to prompt both supply and demand.
- Risk-off sentiment abating. While fundamentals of global economy and corporate earnings are still deteriorating, market sentiments have improved somewhat since mid-to-late-March. VIX and VHSI almost halved from peaks. U.S. T-bills returned to positive after sinking below zero for the first ever time. U.S. corporate bond yield spreads have narrowed modestly.
- Chart: HSI may form a second leg. The U.S. and HK stock markets often rebounded by 38.2% Fibonacci retracement after sell-offs, then formed a second leg before bottoming out. If this time the HSI follows such typical pattern, we can expect it to rebound to 24,200 in the short term, and then fall again to form a second leg to bottom out.
- Accumulate for long term; prefer policy-supportive sectors. The HSI is trading at valuations only seen during financial crises. This is a good opportunity to accumulate HK-listed equities for long-term investors. That said, the pandemic is not yet under control and thus global and HK/China stock markets would remain volatile in the weeks ahead. We prefer policy-supportive industries, such as construction machinery, cement and 5G telecom equipment.
