Momentum stocks to take a breather as Coronavirus fear spreads globally

Asian stocks extended a global selloff on Tuesday as China took more drastic steps to combat coronavirus and extended the Lunar New Year holiday

Momentum-driven stocks such as Gujarat Gas, Relaxo Footwears, Bharti Airtel, and SRF are likely to take a pause as global markets brace for a possible escalation of coronavirus, according to a report from Jefferies. Given that global markets have witnessed a good run over the past six months, the “Wuhan virus” epidemic/coronavirus outbreak may put brakes on their rally, with momentum stocks (stocks that have seen a good run over the past few months) most at risk, while cash/bond-proxies could return in favour over the short-term.
 
“After strong returns since the August 2019 bottom, global equities are trading at elevated valuations. For the MSCI Asia ex-Japan, the current 12-month forward price-to-earnings (PE) is at a post-GFC (global financial crisis) peak, which further adds to the concern that equities could take a breather before focusing on quality/growth at a reasonable price. From a stock perspective, we believe that high momentum stocks are most at risk during such a correction, while cash/bond proxies are likely to be the most resilient in the short-term,” wrote Desh Peramunetilleke, global head of microstrategy at Jefferies, in a co-authored report with Mahesh Kedia and Shrikant Kale, their microstrategy analysts. While the markets did not react when the virus was first detected in December 2019, confirmation regarding human-to-human transmission has significantly increased the risk of an epidemic. In this backdrop, global markets have reacted sharply to the developments over the past few sessions, even as China took drastic steps and extended the Lunar New Year holiday to February 2 nationally, and to February 9 for Shanghai.
 
Economic impact

Back in 2003, the Severe Acute Respiratory Syndrome, or the SARS crisis as it was commonly known, had led to over 700 fatalities in over 30 countries. Every Asia Pacific (APAC) market other than India, Indonesia, and Japan saw a significant decline in GDP growth in the second quarter of 2003 (Q2FY03) at the height of the SARS outbreak. The Chinese economy slowed to 9.1 per cent in this quarter, from 11.1 per cent in Q1FY03. In Hong Kong and Singapore, growth dipped 4.5 percentage points (ppt), while Taiwan’s growth plummeted 6.4 ppt, suggests a Credit Suisse report. However, most markets fully normalised in the second half of 2003.
 
Asian economies entered the coronavirus crisis with much less momentum than during SARS, and will likely face a bigger short-term setback. “Epidemiologically, SARS was essentially a one-quarter event, but Wuhan’s spread might last longer, especially if the virus mutates, and if asymptomatic transmission is possible. With the exception of a few markets, we doubt that monetary or fiscal policy can provide much help,” wrote Dan Fineman, co-head of equity strategy for Asia Pacific at Credit Suisse in a co-authored report with Siriporn Sothikul.

Given the recent developments, they rate Hong Kong, Singapore, Thailand and China as most vulnerable. “The virus should not greatly affect global IT demand and could help internet names with e-commerce businesses,” the Credit Suisse note says. According to Jefferies, Hong Kong-listed stocks that corrected the most during the SARS crisis in 2003 included hotels, airlines, telecom and developers. On the other hand, the most resilient ones were insurance, utilities and railroad. The most resilient sectors included pharma, telecom, health care, real estate investment trusts, and utilities.