Managers of China-exposed funds, which have seen heavy losses in recent weeks during the financial fallout of the coronavirus, are now eyeing buying opportunities in the belief the developing health crisis will not hinder the market beyond the short term.
The highly infectious virus, which has spread beyond China to many countries around the world despite quarantine efforts, has rocked Chinese equities with the MSCI China sliding almost 10% between 15 and 31 January before authorities intervened to support markets.
It has also had an impact beyond China with the outbreak affecting global supply chains and the performance of non-Chinese companies exposed to the country's economy.
Several funds in the IA China/Greater China sector had seen double-digit losses between 15 January - when equity investors began cutting exposure to the country on fears of the impact of the coronavirus - and the beginning of last week (3 February).
However, a $173bn liquidity injection from the Chinese government into the flailing market helped to boost confidence, with the sector now averaging losses of 4.7% between 15 January and 5 February, according to FE fundinfo.
Research from S&P Global shows the fallout from coronavirus is impacting nearly every sector and asset class exposed to the Chinese economy, with the firm's projections predicting that its impact will not stabilise globally until April.
Meanwhile, Oxford Economics predicts that foreign exchange markets "will bear the brunt in the near term as markets digest the fallout".
Chief economist at BNY Mellon Investment Management Shamik Dhar explained the current economic consensus for the "human tragedy" is a 1%-2% reduction in Chinese GDP for the first quarter of this year.
However, he warned that the "short-term hit could be bigger than that" as a result of "drastic" quarantine efforts impacting working hours and retail shopping, and the impact on GDP could be closer to 3%-4% in Q1.
Hyomi Jie, manager of the Fidelity China Consumer fund, which lost 6% between 15 January and 5 February, said "near-term disruption" of the market is "unavoidable" at present.
However, he added "indiscriminate panic selling" could provide "very attractive entry points" for consumer-related stocks, which have been among the most badly hit since investors began cutting exposure to China.
Specifically, Jie said a "mass sell-off" creates "potential buying opportunities" in areas such as online education services, healthcare, and travel as a result of "pent-up" demand released when travelling restrictions are relaxed.
In the meantime, his colleague Jing Ning, manager of the Fidelity Focus fund, which lost 8.2% between 15 January and 5 February, said while economic data is likely to be "disappointing" in the first quarter, there are opportunities in online gaming, streaming and education providers who are working to "attract consumer attention to the services they offer in the safety of the consumer's home".
The IA Global Emerging Markets sector, which has an average exposure to Asia Pacific equities of more than 50%, has also been hit by the fallout of the coronavirus, with an average loss of 4.7% between 15 January and 5 February.
However, the impact of the sell-off was not limited to emerging markets investors, with global energy funds heavily impacted as the outbreak paralysed travel and industrial activity in China; the likes of Schroder Global Energy and Guinness Global Energy have fallen 12.6% and 10.9% respectively over the period.
As a result of the decline, head of multi-asset at Royal London Asset Management Trevor Greetham informed investors last week (4 February) that the firm's investor sentiment indicator is now "registering its first contrarian buy signal" since August 2019.
Greetham said: "Policy makers in China and elsewhere are likely to react by adjusting policy to an easier path and demand is likely to bounce back once the situation comes under control. There are already signs that global growth will improve as the year progresses."
Raheel Altaf, manager of the Artemis Global Emerging Markets fund, which was down 6.8% over the same period, agreed that "opportunities for stockpicking are plentiful" amid a sell-off, noting the "broad" Chinese equity market has seen relatively good performance across healthcare, staples and technology.
He also noted that the Chinese central bank could "step up efforts to support markets", adding that "the government has tools at their disposal to support growth in the economy".
However, Chetan Sehgal, lead portfolio manager of the Templeton Emerging Markets Investment trust (TEMIT), believes there is a "negative" outlook for Chinese assets and Asia more broadly over the short term, warning that the government's efforts "will likely remain focused on containing the spread of the virus" rather than protecting equity markets.
While Sehgal is "neutral" on the outlook for Asian equity markets over the medium term, he said that a "further correction could occur as uncertainty persists in the coming weeks and markets continue to consolidate after a period of strong performance".
Too quick to react
Portfolio manager of the Templeton China fund Michael Lai said that while the "current correction may offer more reasonable entry points", he warned the situation "remains fluid and may further worsen in the near term".
He also noted that some of the best-performing funds exposed to the Chinese market "have tended to have a much higher exposure to the technology sector", with Lai cautioning investors of "a widening valuation gap between growth and value in the Chinese market in 2019".
Lai explained: "The current outbreak is occurring after a year of strong performance in China equity markets, which had led to pockets of stretched valuations in sectors traditionally seen as growth-oriented, such as the consumer or tech sectors."
Elsewhere, multi-asset CIO at Neuberger Berman Erik Knutzen warned that it is "too early to make big investment decisions" as a result of the fallout of the coronavirus, adding that the firm does not see a need to add "new portfolio hedges... [or to begin] using current volatility to addrisk aggressively".
He added: "For now, we continue to monitor the situation carefully, not only via public information sources, but also via our own global research platform in the affected sectors, from airlines and retail to healthcare and pharmaceuticals."