Taking steps to stay on top of volatility
A diversified portfolio with a defensive bias could help build portfolio resilience while seeking yield opportunities.
The coronavirus outbreak in China and the rest of the world has dominated headlines in recent weeks. As we hope for a speedy recovery for those affected by the virus, our EMAP Equities Team shares our insights on the potential impact such events could have on equity investments.
Fundamentals remain sound
Generally, some short-term economic fallout are expected during any viral outbreaks. But once the situation is brought under control, we believe financial markets are likely to rebound. Still, amid the market unknowns, what is key for investors is to filter out the noise and stay invested.
As China races to contain the current epidemic, it's worthwhile to note that its fundamentals are also vastly different now compared with 2003 during the outbreak of Severe Acute Respiratory Syndrome (SARS).
First of all, China’s economy has increased manifold since 2003 and is further integrated into the global economic system. The economy has generally been enhanced since then.
Secondly, China’s economic structure has undergone a fundamental change over the past 20 years, fostered by advancements in technology and a digital economy. So even though the current epidemic may crimp physical retail consumption, online sales would continue to advance.
Thirdly, China’s capital markets have continued to expand and open up, and are aligning with developed market systems.
Sector focus: healthcare, consumption and technology1
In our view, the Chinese healthcare, consumption and technology sectors have vast potential for growth as these sectors are closely-tied to China’s long-term economic development.
Even though the Chinese healthcare market is relatively fragmented, there is vast potential for growth from the provision of care to treatments and pharmaceuticals. And the government is also investing heavily in medical research and development. In recent years, China’s State Council has mapped out various key priorities on healthcare reforms, and the current virus situation could accelerate the pace of change2.
The burgeoning middle class and rising disposable household income are a boon for consumption in China. In addition, Chinese consumers are increasingly focused on product quality and their overall retail experience. Such growing consumption trends, alongside technological innovation, could spur more business opportunities.
China’s technology sector is benefitting from the adoption of digital technologies, innovation and strong consumption growth. And the Chinese tech industry is advancing from smartphone manufacturing and e-commerce development into the realms of software development, cloud computing and biotechnology. Technological innovation is also gaining momentum, especially with the emergence of local software companies facilitating the digitalisation of business operations. The number of Chinese software giants are on the rise.
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Overall, market volatility will likely persist with an evolving coronavirus situation as well as geopolitical and trade uncertainties. But China continues to focus on quality rather than quantity in its economic development and this is generating potential opportunities for research-driven, long-term investors.