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Catching the coronavirus might be one way of falling sick; reading too much about it might well be another. To minimise that risk, we'll spare you our ill-informed pandemic prognostications and focus on the investing.
In office discussions, James Greenhalgh noted the SARS comparison and suspects the economic impacts will be similarly short-lived. Gaurav Sodhi, meanwhile, worries "that while citizens are arguably overreacting to the medical threat posed by the virus investors aren't worried enough."
And Mickey Mordech has already got his head around the worst-case scenario: "A global pandemic killing hundreds of millions could result in widespread power cuts, food shortages and a breakdown in law and order. If so, the stock market is unlikely to be your biggest concern."
What we all agree on is that the subconsciously apocalyptic fear-mongering expressed in almost every news report has economic consequences. In this sense, the reaction to the threat of the virus may be more important than the virus itself.
At a time when the Chinese are usually celebrating Chinese New Year, shops, restaurants and cinemas are shut. In Australia, meanwhile, people are stocking up on masks and beans, the ideal purchasing combo to offset a smelly dystopian future.
China is essential to the global economy now in a way it wasn't 17 years ago when SARS struck. Market valuations are also much higher. Even so, the reaction to the threat seems disproportionate. Thus far, 37,500 cases of coronavirus have been reported whilst 811 Chinese have died. Air pollution, meanwhile, is estimated to kill 4,000 Chinese a day.
Once again, humanity has demonstrated an impressive capacity to over-react. As ever, there is an upside; finally, we can show an image of a person with pants on their head. Check that one off the bucket list.
The lesson for investors is an old one; people are overwhelmingly motivated by fear. In preparation for being greedy, let's look at the ASX-listed stocks most likely to be affected by the panic.
Any slowdown in China will hit commodity prices, although things aren't that simple. A big slowdown in China will be met with a monster stimulus; that could fuel higher commodity prices. The miners are unlikely to be hit too hard so, at least in this area I doubt we'll get many opportunities.
A2 Milk could be more interesting. Its sales to China still skew heavily to daigou exporters, which act like sales agents. With travel restrictions, they have their hands tied and sales could be impacted. While the company has reduced its reliance on daigou it still accounts for 60% of China sales. The company has a lot to lose if restrictive travel continues. But with superb economics and a pristine balance sheet there's a lot to like about A2. We'll be waiting for the upcoming results first but will consider nibbling around $12 a share.
Along with a few less respectable terms, I'm known as the 'buy on bad news' guy. But the bad news that provokes a buy order from me is usually company-specific rather than market-wide; a profit warning to which coronavirus contributed, for example, rather than the coronavirus scare itself. I wouldn't be buying stocks during this period unless they're already good value. There are, however, a number of stocks that may be directly impacted.
We've highlighted the difficult issues in Flight Centre's leisure business before, which may dog the company for years. We currently have a Buy on the stock at $35 but there's some chance we'll reduce this depending on business performance over time. The long-term strategic concerns outweigh any short-term effect from coronavirus.
We've recently considered Corporate Travel, which looked potentially interesting. There's a case for dipping a toe in the water during this downturn, particularly around the current price (less than $18). However, we still have a few management concerns and, to upgrade before we're comfortable because of a one-off issue like this, would be premature. Webjet is similar; we're not yet fully comfortable with the strategy, business, or management, which is why the stock hasn't yet appeared on the Buy list.
Having lost Navitas to private equity, the only significant education stock likely to be affected is IDP Education. We recently ceased coverage because the price didn't factor in external risks, including global pandemics. It would need to fall a long way before we became interested but below $10 we'd take another look.
Many retailers are dependent on China for their supply chains so there's some risk of disruption. With some factories closed, retailers and wholesalers from Wesfarmers and Lovisa to Bapcor might miss out on sales if that happens. In terms of buying opportunities, none are particularly close price-wise. Other factors including, for example, weak Australian same-store sales for Lovisa this reporting season, would be more likely reasons for an upgrade.
Seek is perhaps the company that has most to fear from coronavirus. Its stake in Zhaopin means it is directly exposed to China's employment market, which might suffer if coronavirus contributes to a lengthy downturn. Seek Asia is also likely to suffer some fallout if travel is restricted. Our Buy price remains at $17, although we might lift this at the time of the half-yearly result.
Blackmores is quite exposed to China, accounting for 20% of sales, and more still from Chinese nationals buying vitamins in Australia and shipping them home - that daigou channel again. Any disruption or slowdown in spending could have a ripple effect. Oddly, though, Blackmores may also be a beneficiary. Vitamins might not work against the virus but perhaps more people will buy them hoping to boost their immunity.
Any travel bans or decline in tourism will be bad news for Sydney Airport and Qantas. China is Sydney Airport's largest inbound market and has been one of the fastest growing. Still, overall exposure is low; 60% of aircraft movements are domestic and, of the international passengers, less than 10% are accounted for by Chinese.
Sydney Airport has survived plenty of epidemics, including SARS, Avian flu and Ebola. All have been blips in a long-term trend of growing demand for travel. If the stock gets closer to the $6.50 mark, we'd be interested in topping up.
Crown and Star Entertainment's casinos may get hit by a travel ban, too. The percentage of revenue that Chinese visitors contribute to the businesses overall is unknown but VIP revenue accounts for around 15-20%, the bulk of it Chinese high net worth individuals. Crown and Star could be hit doubly hard with fewer visitors and less turnover if those VIPs either stay away or gamble less.
Pandemics make the healthcare sector interesting. Ansell could benefit from an increase in medical glove and mask sales. The medical division has been stagnant in recent years; despite it being only small ins revenue terms coronavirus could bring the spotlight back to its brands when trust is paramount.
CSL, one of the world's largest flu vaccine makers, may also benefit. It's in discussions with a number of institutions, offering "expertise, technologies and facilities" according to smh.com.au. CSL is one of Australia's highest-quality companies and major mispricings are rare; the stock isn't far from fair value. We'd be interested below $200 and will likely revise that upwards at this month's interim result.
An obvious area of opportunity may be among the fund managers. Should genuine panic set in, this sector could be rapidly sold off, as it was in late 2018. We've currently got a buy on Platinum below $3 but the current share price is a long way from that right now.
In the unlikely event the public stays home, we'd be making less trips to the pub or the shopping centre, getting our masks and beans home delivered. That could affect stocks like ALE Property Group or Unibail-Rodamco-Westfield. ALE would be attractive at around $4.50 but we don't have a price guide around URW at present.
Then there's United Overseas Australia. It builds and owns residential and commercial property in Malaysia, where Chinese buyers make up a portion of Malaysian property demand. Given the company's lack of debt, management isn't in any rush to offload properties, so we'd expect the effect - if any - to be transitory. Our buy price under 75 cents remains unchanged.
John Addis is the founder and editor of Intelligent Investor. To access more share research from Intelligent Investor, start a 15-day free trial.