Global financial markets fear the consequences of the spread of the Chinese Coronavirus. After the Chinese authorities announced the threat of an epidemic on January 20, global stock markets responded with a fall. The Moscow Exchange Index fell 4.2%, Dow Jones – 2.3%, and Hong Kong Hang Seng – 3.1%. At the same time, quotes of gold, which is considered a protective asset, grew by 1.3%, from $ 1,559 to $ 1,577 per ounce.
The opinions of experts were divided. Some believe that fears are exaggerated and that markets will calm down soon, while others expect a slowdown in the Chinese economy and see a threat to certain sectors of the business.
Which companies have been affected by the virus?
Chinese authorities have suspended the work of factories where they make Samsung and Apple equipment. Experts believe that this may hinder the release of new gadgets.
Starbucks has closed more than half of its coffee shops in China. Due to the threat of the spread of infection, McDonald’s has closed some restaurants in China since January 25. Walt Disney has closed its amusement park in Shanghai.
Against the backdrop of the virus epidemic, stock prices of Chinese carriers have fallen. After a break for the New Year holidays on the Hong Kong Stock Exchange on Wednesday, January 29, China Southern shares fell 6.7%, Air China securities fell 5.5%, and China Eastern Airlines stock quotes fell 7.7%.
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After US Secretary of Health and Human Services Alex Azar announced that remdesivir, Gilead Sciences, and AbbVie Kaletra could be used to treat patients with this virus, stocks of both manufacturers rose by several percents, although the market as a whole fell. Then, several more companies joined the fight for the development of vaccines against coronavirus – these are Clover Biopharmaceuticals and Primerdesign.
Also, attention was drawn to the growth of shares in companies that sell masks, develop vaccines, and supply chemical protective suits. Such companies include Alpha Pro Tech, Lakeland Industries, Vir Biotechnology, Novavax or Allied Healthcare Products.
Private investors can look towards ETFs with pharmaceutical specialties such as the MSCI China Health Care ETF or the Vanguard Health Care Index Fund
Gold is suitable as a safe asset, but the return on investment in it will be within 5–8% during the current year.
After the initial nervous reaction, stocks of gold mining companies began to recover quickly. There is no reason for the fall in gold prices, given not only its status as a safe asset but also the easing of monetary and budgetary policies around the world, which further increases liquidity and leads to a competitive devaluation of currencies.
In late February, the price of gold and after it the shares of gold mining companies fell sharply. Selling them, investors plugged holes in their portfolios, resulting from a collapse in the stock market. Gold not only won back all the losses but also rose in price to $1690. And the stock exchange fund of VanEck Vectors Gold Miners companies leveled most of the fall of February.
3. Undervalued stocks
Do not forget that sales periods are an indirect way to make money in the future on cheaper papers. With fear in the market, you need to think about greed.
The dividend yield of the Russian market for 12 months rose to almost 6.5% on January 27. Accordingly, if the company’s business is not in great doubt, such stocks will quickly regain their positions that they lost during the period of panic.
Pay attention to companies that benefit from increased volatility in the markets. For example, the American exchange group CME Group. The company’s shares maintain high ratings and in the medium term have growth potential of more than 10%, according to estimates of sell-side analysts on Wall Street.
Banks are also heavily affected by the devaluation of the ruble. After stabilizing the situation, you can pay attention to the shares of Sberbank (-20%). However, it is worth remembering the risks that a possible recession will be among the first to hit the banks. The deterioration in the quality of the loan portfolio due to the prolonged negative impact of coronavirus can lead to an increase in reserves and a decrease in profits. In this case, plans for dividends of 50% of the forecast net profit of 1 trillion rubles will be under pressure.
In recent weeks, TCS Group receipts (-40%) have become one of the most affected securities in the industry. Before the collapse of the market, the bank showed a high rate of business growth and a significant level of return on capital, 60–80% per year. Although in reality, the risks regarding the company itself seem exaggerated.
5. Oil and gas sector
As noted above, the removal of quarantine measures after the decline in the incidence of COVID-19 will support oil quotes. The issue of excess oil production may remain relevant. If the goal of OPEC + participants was to squeeze high-cost oil producers from the market, then one can hardly hope for a sharp recovery in oil prices, for example, in the region of $ 50 per barrel of Brent. For this reason, oil stocks may be slightly less interesting.
Nevertheless, the investor has a wide choice in the Russian market for purchasing securities of the sector. In the first place, shares of Lukoil (-27%) and Tatneft (-37%) may be of interest. These are efficient private oil companies with the best corporate practices and built relationships with minority shareholders. Tatneft has one of the highest EBITDA margins in the sector. And in Lukoil, they said that the company was ready for a period of high volatility and low oil prices and could resume repurchase operations using borrowed funds. The company sends all adjusted net cash flow to dividends, and the expected reduction in the investment program will support this indicator.
Separately, shares of gas companies can be noted. After the OPEC + deal was disrupted, gas prices about oil began to look significantly better. Along with the reduction in current operations of shale companies, significant volumes of associated petroleum gas may be eliminated from the market. This factor, as well as the devaluation of the ruble, help Gazprom to avoid significant sales. Since the beginning of March, the stock has decreased by 17%, which is significantly lower than other oil and gas companies.
The change in the dynamics of the incidence of COVID-19 should spur the rebound in gas prices. Not only pipe gas suppliers but also LNG producers will benefit from this. The most promising in this direction in Russia is Novatek. Stocks since the beginning of March have crashed by 20%, and from maximums in the Moscow Exchange Index by 42%. However, fans of dividend stories should remember that Novatek is not one. Dividend yield based on payments in 2019 and for 730 rubles. per paper is a little over 4%. However, Novatek is a growing business. After commissioning Yamal LNG with a capacity of 19 million tons over the next 3-5 years, the company plans to launch two more gas liquefaction plants with a total capacity of more than 20 million tons per year.
The actions of retailers stand apart. This sector will also benefit from the strengthening of the ruble, however, the current booming demand for food products has already significantly supported quotes. Magnit shares have added more than 10% since the beginning of the week, Ribbon papers in positive territory by more than 15%. It is worth noting that local sales failure may follow a wave of demand for essential goods. If retailers are not able to plan their purchases correctly, after lifting quarantine measures, we can see an increase in stocks, weak sales dynamics and a new round of pressure on the profitability of networks due to increased competition.
It is also worth noting that the consequences of combating the spread of a new disease are very likely to lead to a recession in the global and Russian economies and, as a result, to a decrease in real incomes of the population, which will negatively affect the industry. But there are certain advantages to the weakening of the ruble. Devaluation will lead to a moderate increase in inflation, which may support the revenue of companies.
As for the stocks of non-food retailers, they were hit harder by quarantine measures. For example, the shares of the Children’s World since the beginning of March have lost 30%. But with the restoration of social and economic activity, paper can show a significant rebound. The risks of deepening the correction remain, but we recall that before the epidemic spread, revenue grew at a double-digit pace, the company actively entered the CIS markets and made good progress in online sales. Decrease in disposable income during 2014–2018 was not an obstacle to the Children’s world for expansion.
Investors should keep MTS shares in mind (-21%). The company’s revenue is unlikely to suffer from the consequences of the outbreak of COVID-19, dividends are likely to remain at the current level – 28 rubles. per share. The possible resumption of share repurchase.
But the dividend yield of the stock may be slightly lower than that of MTS. The expected dividend yield for 2019 can be about 8–9%. But most importantly, the company’s portfolio now has a growing asset – Tele2. This provides support to the papers.
Many electricity stocks are also considered dividends. The yield on several securities now exceeds 10%. At the same time, the risks of cancellation of payments or their significant fall are lower than in other sectors.
9. Food and napkins
Campbell Soup February 4 stocks rose 10%, this is their strongest daily growth in the last two decades. In the next two years, stocks fell slightly from the level achieved, although the S&P 500 index fell 5%. On February 19, Campbell Soup shares rose 4.8% while the S&P 500 lost more than 12%. During the same time, the shares of the American chain of stores near the Kroger house went up by 8.5%, the shares of the manufacturer of disinfectant Clorox – by 5.2%, and the developers of video games Electronic Arts and video service Netflix decreased by 2-4%, which can also be considered an achievement against the background of a market crash. The stocks of Kimberly-Clark, which in particular produces medical clothing and hygiene materials, fell in February along with the entire market, but in March soared to a new all-time high. All these papers participate in the “corona trading”. People buy food and video games in case they have to sit at home. And because of the coronavirus, the likelihood that consumers will stock up on soup and eat at home more often than usual has increased.
10. Pay attention to China
The Chinese market has shown its best from the beginning of February. Opening February 3 after a new year’s vacation with a 9% drop, the index CSI 300 has since grown 13.7%. On February 5, it even closed at the highest level since the beginning of 2018.
The growth rate of those infected with Coronavirus has been falling in China since the beginning of February. The mortality rate, according to recent statistics, fell to 1% against 3-4% at the height of the epidemic in the country and outside of China now. The stock market is also supported by incentive measures by the authorities, such as a ban on bankruptcy, an extension of the terms of circulation of bonds and excessive liquidity. It is unlikely that the market will continue to grow actively, given the uncertainty of the situation in the world, but it undoubtedly demonstrates relative strength. Probably, international investors also supported the growth of Chinese stocks, hoping that China, being the first to be in a crisis, would be the first to emerge from it.
About the author: Melisa Marzett is a freelance writer who has always been much of a reader, a cinema lover, more of a listener than a talker and rather introvert than an extrovert. However, she has a circle of friends she enjoys spending time with. She spends most of her time writing though and her posts are available for reading on paper editors.