Pomona Wealth Market Comment February 2020 - The Chinese Woes of 2020

The Year of the Rat and a Virus

With the Chinese New Year celebrations just coming to an end, we have entered the Year of the Rat. In the Chinese culture, rats were a sign of wealth and surplus because of the rat’s fast and abundant reproduction rate. Before we can enjoy this year’s cornucopia, we must contend with a new virus emanating from Wuhan and spreading across the world. This is starkly reminiscent of the SARS outbreak in early 2003 which I witnessed first-hand as a resident of Singapore. The city state did not lock the nation down but travelling, meeting in public places were discouraged. Schools were closed, non-essential tasks were moved to home offices wherever possible. Coffee shops, restaurants, movie theaters were all empty. An eerie silence descended onto the city as all public activity almost came to a complete stop. From the initial analysis, there are many similarities between SARS and the Corona virus. We will not delve into the medical aspects of the virus but rather leave this to specialists. Our concern here is what repercussions on the global economy this outbreak is likely to have. The equity markets have already reacted with a general indiscriminate sell off. As the virus spreads and so long as the rate of infection grows, the travel industry will suffer immediately and most directly: airlines, hotel chains, amusement parks (Disney closed its park in Shanghai) and retail chains (Starbucks is closing its stores in the affected areas in China). Gradually, as the repercussion make their way through the economy, we will see how supply chains get disrupted. Who really knew that Wuhan is a major supplier to the automobile industry? Our thoughts go out to the affected and we are confident that the measures that have been and will be implemented will be effective and the outbreak will be contained. Alas, the topic will be with us at least until the end of March. That will give financial markets time to adjust and become more discriminate in its reactions. As economic growth will take a hit – early suggestions are -0.4% for China and the US – these predictions are just preliminary as we have not yet seen the peak of the outbreak. The best reaction now is to stay calm. The SARS outbreak was contained, and economic activity resumed quickly thereafter. Just a few months after the end of the SARS outbreak, stocks had fully recovered, and the financial market moved on without looking back. The best guess now is that companies in the traditional industries will take a hit such as travel, manufacturing, and retail. Sectors that are likely to get a boost are ecommerce, internet, deliveries and gaming stocks.

We will be happy to discuss your individual holdings and the general situation of the financial markets as the virus spreads. We are confident that this sad outbreak will also present opportunities which we will take advantage of. Remember, the Chinese see the rat as a sign of wealth.

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