What we're calling Wuhan Acute Respiratory Syndrome here in Hong Kong has a new, non-judgmental name: Covid-19. It's designed not to stigmatize a specific place, so it's focus-group generic, coronavirus disease from the year 2019. I prefer WARS!
The death numbers and infection totals continue to increase, but new infections in particular have been falling. If the official Chinese numbers are to be believed - and that's a big IF - some point this month should be the peak of the disease. So far, aside from the crisis on the cruise ship in Japan, there's been no broad-based outbreak in another country, particularly not a developing one, which could be catastrophic.
So what trading themes can we identify, if the disease is brought under control? The economic impact is still a guessing game. Chinese President Xi Jinping still isn't shaking anyone's hand in congratulation, or in fact for any other reason, that's for sure.
But there are three ideas worth watching, as identified by Société Générale in a paper last week. Those themes still apply.
China small caps
Chinese small-capitalization stocks have become detached from large caps over the last four years. This "de-rating" accelerated in 2018 as Beijing cut off shadow banking and other avenues to credit, forcing companies to deleverage.
Small-cap stocks are now well below large-caps in terms of valuation. In technical-trading speak, their price/earnings valuations are more than one standard deviation below their 10-year average vs. large caps.
A bonus to a focus on small caps is that they have a greater concentration in technology, industrials and raw materials, while large caps have a dramatic overexposure to banks and financials. Tech has been the best long-term sector in China, and both manufacturing and commodities have been very hard-hit by WARS.
SocGen says that the "trend reversal" of the last few months, with small caps starting to outperform, is likely to continue once the virus is fully contained. Small caps are also now likely to benefit more than large caps from Beijing's easier monetary policy, designed to stimulate the virus-infected economy.
U.S. investors can target Chinese small caps with the Xtrackers Harvest CSI 500 China-A Shares Small Cap Fund (ASHS) . It tracks the CSI 500 index, which selects 500 stocks after screening out both members of the CSI 300 index and the largest 300 mainland stocks (should be almost the same 300 stocks, but just in case ...).
In other words, that ETF tracks small- and mid-cap A share stocks. The fund is up 0.8% in 2020, whereas the comparable Xtrackers Harvest CSI 300 China-A Shares Fund (ASHR) is down 4.3%. If SocGen is right, that outperformance should only intensify as the virus recedes.
Hong Kong stocks
Here in Hong Kong, we're wondering what else can go wrong. The U.S.-China trade war hit home hard, since most Hong Kong companies are involved in China trade, whether virtual or real. Then demonstrations started last spring that continued through year-end, growing increasingly violent. And now of course WARS has hit.
The first big protest against a now-dead extradition law brought an estimated 1 million people out onto the streets on June 9. Since then, Hong Kong equities have significantly underperformed Chinese and Asian stocks.
SocGen says this has brought them to virtually their lowest point in the last 20 years. Property stocks in particular, firmly rooted in Hong Kong but often with an extension of business in the mainland, have done the worst.
Hong Kong is in recession now, and may see the size of its economy decline for full-year 2020. But SocGen says Hong Kong stocks look like an "attractive value proposition" if the virus is brought under control and we start to see a stock-market rebound in Q2.
The iShares MSCI Hong Kong ETF (EWH) is by far the largest of the three U.S.-listed Hong Kong-specific funds. It's had a torrid time since the protests intensified middle of last year. Those social tensions saw it lose 16.3% between mid-July and mid-August.
A tentative rally induced by the truce in the U.S.-China trade war has now been undone by the virus. The coronavirus, with 49 patients now reported in Hong Kong as well as one death, caused another 8.7% drop, one it is showing signs of clawing back with gains in February.
The Franklin FTSE Hong Kong ETF (FLHK) introduces a cap on weightings, which reduces an overdependence on AIA from 24.3% of the iShares fund to 19.6%. So it may be an even better bet, although it is far smaller.
The largest Hong Kong property developers typically have ADRs. Chief among them would be the Link REIT (LKREF) , which manages a lot of parking lots and shopping centers in public housing estates. It's very well run, very locally exposed, and really the only Hong Kong REIT worth worrying about.
Sun Hung Kai Properties (SUHJY) is a high-end developer, while CK Asset Holdings (CNGKY) is a mid-market apartment builder. Sun Hung Kai would be preferable since its high-end units continue to sell well, almost whatever the market.
The truly brave could turn to Macau casino operators Galaxy Entertainment Group (GXYYY) and Sands China (SCHYY) . But with all casinos forcibly closed for two weeks, they are sure to take a punishing earnings hit, and it's still not sure when gambling will resume. Those stocks are, well, a gamble.
The last trading strategy SocGen highlights is to target Asian telecoms and their suppliers with businesses that focus on 5G.
Subscriptions to 5G are due to quadruple in 2020 to 120 million, and rise to 2.7 billion connections by 2025, capturing 20% of the global telecom market.
Chipset sales for 5G should therefore rise from US$1 billion in 2019 to US$8 billion by 2023. Any companies along the chain - smartphone makers, smartphone parts suppliers, semiconductor manufacturers, tower and network infrastructure providers - stand to benefit.
The virus outbreak has dampened enthusiasm for those kind of stocks, since there's sure to be disruption to that supply chain, causing production delays and disruption in implementation. But once the virus is corralled, those concerns should ease.
There are around 20 companies with the heaviest exposure to 5G. Samsung Electronics LSE:SMSN is the largest among them, making both chips for 5G and handsets. So you get a double whammy of exposure. Another company in that camp, but with a U.S. ADR, is Kyocera (KYOCY) . It also makes both smartphones and their parts, with a specialization in "extreme" phones, waterproof, drop-proof models.
Taiwanese chipmaker TSMC is another giant that has been muddling through a glut of supply in the chip market. With those excesses correcting, it too could see a big boost if and when 5G takes off.
Chinese smartphone maker Xiaomi (XIACY) , Japanese chipmaker Nidec (NJDCY) and Taiwanese smartphone parts supplier Foxconn (HNHPF) , which has massive operations in China, are all worth watching for recovery in 5G prospects and sentiment.