Indian IT, telecom safe-haven bets amid coronavirus scare: BNP Paribas

Global equity markets are likely to remain volatile in the near-term as coronavirus epidemic fears persist, but this can be used to accumulate stocks at lower levels, argue leading market experts. The markets, they say, expect the Chinese economy to rebound strongly in the second quarter of calendar year 2020 (CY20), which in turn, will drive the global frontline indices higher.

“The base case on the Coronavirus remains that the rate of infections in China is slowing and that the majority of cases remain confined to the unfortunate Hubei province. Still there are obvious risks to this base case; most particularly as stock markets are seemingly looking for a strong rebound in China in the second quarter. This means they are increasingly willing to look through the fact that the first quarter appears to be a write-off,” wrote Christopher Wood, global head of equity strategy at Jefferies in GREED & fear, his weekly note to investors.

Jefferies’ China strategist Alexious Lee expects 20-30 per cent of the 300 million migrant workers will return to work before the beginning of March after a 14-day quarantine period, and another 40-50 per cent by the end of March 2020.

Among the Asian economies, the ensuing decline in trade and tourism could impact Thailand, Singapore, Malaysia and Korea the most – in that order, and Indonesia and India the least, wrote analysts at BNP Paribas in a recent report. “Korea, Japan, Thailand, Hong Kong and Taiwan could be most impacted by supply chain disruptions. Weak investor sentiment in emerging markets (EM) could affect the current account deficit countries – India and Indonesia,” wrote Manishi Raychaudhuri, head of equity research for Asia Pacific at BNP Paribas.

Given the developments, BNP Paribas has cut China’s 2020 GDP growth estimate by 1.2 per cent to 4.5 per cent. Their GDP growth estimate for 2020 stands reduced to 2.6 per cent from 3.0 per cent, driven by China (-1.2 per cent), Japan (-0.9 per cent) and important Asian pockets like Korea (-0.5 per cent) and Thailand (-0.6 per cent).

“With China being the world’s second-largest economy and leading trading partner, the economic disruption caused by the coronavirus to the global economy is believed to be more significant than during the SARS episode. China’s share of global GDP and export, has grown from 8.7 per cent and 6.7 per cent in 2003, to 18.7 per cent and 14.5 per cent in 2018, respectively,” Raychaudhuri said.

Where to invest?

Though the near-term could be marked with volatility till the coronavirus fears start receding meaningfully, BNP Paribas sees Indian markets to be relatively insulated from the coronavirus’ outbreak. Indian information technology (IT) and telecom are the two sectors, according to them, remain safe-haven bets.

“Some markets that are relatively less exposed to the economic contagion arising from the coronavirus outbreak – India is the first one that comes to mind. Indian IT and Telecom fit the bill – the former being the perfect dollar appreciation hedge and the latter benefitting from the likely decline in competitive pressures,” wrote Raychaudhuri.

Another sector he remains optimistic on in the Indian context is consumer staples that has margin support from benign commodity prices. However, he does caution against the steep valuation of stocks in this sector amid a likely slowdown in consumer spending due to potential pressures on household disposable income.