Will China’s Flu Roll the Bull Market?

I’m puzzled. Headline news shows China becoming isolated as airlines cancel some 50,000 flights. Last week, analysts talked of a market meltdown. An economist warned of Chinese GDP growth falling below 2%. And the deadly coronavirus has infected around 30,000 people, killing over 800.

The markets did come back a bit. And it looked like this long-run bull was about to stumble. Even fall on its back.

But that hasn’t come to pass. European stocks are up. The Australian dollar is up. I nervously took the opportunity to top-up on strategic portfolio asset Auckland Airport [NZX:AIA] during the initial rash of fear — which sometimes can be a great time to buy.

Then it bottomed out a little more. But now is up again.

Investing for the long-run

Yes, the analysts will tell you Auckland Airport is an expensive stock. It is. But in this area of my portfolio, I’m looking to get into the assets — not so much the short-term earnings — since I originally bought in at around $3.50.

So, with a pandemic threatened in the world’s second-largest economy, why are stock markets continuing to roll on like tomorrow is always rosy?

And is this time to get in — or sell out?

Well, the starting point is you have a world of investors hungry for yield. They’re not getting it from fixed interest. And property may be competitive and cumbersome, unless at the larger-ticket commercial end, which few can afford.

Right now, before the restaurant even opens, you have a queue of hungry diners. I’m seeing that every day in market depth on the larger companies I trade. Especially with those known for reasonable and reliable dividends.

Despite all the threats coming out of China — disease and trade slowdown — there’s actually been a few major factors that have cemented certainty.

Yes, some certainty for the future is what investors like.

The Trump acquittal

Love him or loathe him, The Donald is a friend of the markets. He gives them what they like. Tax cuts. Deregulation. Protection of their industries. A burgeoning jobs market. And a strong dollar.

Now he’s free from impeachment. The chants for ‘four more years’ at his State of the Union address indicates the fervent support awash in Republican seats. And even in previous left-leaning areas swayed by the economics.

An unchained Trump may continue to support record heights on the Dow.

China’s countermeasures

There is an advantage in running an authoritarian regime. You can react quickly and centrally to roll out hospitals, slash tariffs, and provide other economic stimulus. This is what China is doing.

The cut to proposed tariffs on US goods gives wary investors some confidence that the new trade deal is on the right track. Previously, this confidence was not priced in.

But there are also holes in the wider communist state. Reports of information suppression and mismanagement are swirling around the Chinese internet. Apparently President Xi himself is directing the Wuhan coronavirus response — but he is nowhere to be seen.

Could this be China’s Chernobyl moment? An eventual forced reckoning where increased demands for democracy open up the country?

This is doubtful. China has something the Soviet Union never really had beyond military power. Economic power.

Still, any further opening of China’s mighty market may only further fuel a rampant grab for equities. As businesses across the globe get set to profit.

What the markets are realising is that the virus and crash threats last week are probably much less than perceived. Especially for businesses which do not depend on China.  And any dip in stock prices can provide a welcome opportunity to add yield.

Investing in 2020

And so the refrain continues…

  • ‘Markets are so high.’
  • ‘The US is high.’
  • ‘There has to be a correction soon.’
  • ‘A crash is coming.’
  • ‘Sell now and get out before the downturn.’
  • ‘Buy low. Sell high.’

I’m not worrying about any of this noise. I’m looking for value. However, to be fair, it is very hard to find, especially on the NZX.

So you cast the net wider. The ASX, which faces pressure due to bush fires, household debt, and an economy so wound into China. The European exchanges. Britain — though a new confidence is being struck there thanks to a determined Brexit plan endorsed by the electorate.

You’re buying the short-run fear discount in a situation that will be just fine in the long-run.

And, ultimately, the success of any business you’re investing in comes down to one thing: will people keep buying from it?

Auckland Airport should be clouded in fear. Flights from China are under threat. The runway had to close twice recently due to the need for urgent repairs. Analysts continue to say it is overvalued on share price to cash flow.

But all this does not get around the fact that this is the only way for commercial jetliners to get in or out of Auckland. And this island is growing. So, over the long-run, if you receive a dividend of 3% and capital value increases at some point, you start to see why the share price seems a little bulletproof.

In our Lifetime Wealth premium research, we look for such ‘bulletproof’ stocks around the globe. But not stocks that have so fully realised their price. Instead we seek out those that sit in a value situation, providing the potential for income and growth.

Of course, these situations do carry risk. There’s only so much fear markets can take. And you never know what is around the corner. But without taking a few risks, most of us wouldn’t get anywhere.

 

Regards,

Simon Angelo

Editor, WealthMorning.com

 


Simon is the editor of Wealth Morning and has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge fund industry in Europe. Before this he owned an award-winning professional services business and online learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book and manages global share portfolios.


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