04/02/2020 - 12:02
Strategy: Coronavirus & the Market Panic
| What’s new? |
- Panic over 2019-nCoV has crushed our thesis for a post-Tet rally.
- Policies to control the virus at home and globally are prudent and wise, but also have macro implications.
- History is an untrustworthy guide, but buying into a panic of this nature (e.g. Taiwan and HK in 2003) can lead to attractive subsequent returns.
- Health > money. Stay safe!
Coronavirus and the market selloff
A post-holiday rout. As of today’s lunchtime close, the VNINDEX has fallen 6.6% since returning from the holidays, crushing our thesis for a post-Tet rally. Foreigners net sold aggressively along with local investors on Jan 30-31. But in a positive sign, FINIs were small net buyers on Feb 3 – the most volatile day of the coronavirus panic so far.
Macro impact is likely greater than that of SARS. The SARS outbreak of 2003 was severe but short, whereas the severity and duration of 2019-nCOV remain unknown. However, China’s global significance has gone parabolic since 2003, and the various measures to control the CoV both in China and globally appear to be far more substantial and economically significant than policies to combat SARS were. The implications for Vietnam’s manufacturing, agriculture, and services are negative, but the degree of this impact will depend on the duration of the outbreak.
“Catch a falling knife” vs “be greedy when others are fearful”. History can be an untrustworthy guide, but similar panics have offered attractive buying opportunities in the past. For example, Taiwan stocks fell 11% in five trading sessions when the SARS panic hit the market there. Greedy index buyers on Day Five of that panic then enjoyed a 42% rally to yearend (plus dividends). Will history rhyme?
Market volatility is extremely likely to continue in the short term and calling a bottom is a mug’s game given the epidemiological unknowns of the coronavirus. That said, we agree with Mr. Buffet’s advice (i.e., “be greedy…”) and we believe that investors who can endure the volatility will be well rewarded on a 12- to 18-month view. We don’t expect Vietnam to replicate Taiwan’s 2003 performance this year, but our peak VNI target of 1000 points offers 8% upside from the lunchtime close.
Our top picks are: 1) VHM – and we like the shift from high-end to the mid-end property even more now; 2) VCB and STB – a barbell position in the banks; 3) POW – a defensive play on electricity, which is undersupplied regardless of any macro slowdown; and 4) HCM – as a long-term play on the development of Vietnam’s capital markets.
Steel manufacturer Hoa Phat (HPG VN, Not rated) could be interesting here given the possible resumption of infrastructure projects in 2021. Based on Bloomberg consensus forecasts for 2021E, HPG is currently trading on 6.8x PER and 1.1x PBV with 17.8% ROE. Street forecasts imply a 6.2% dividend yield for HPG in 2021E.
