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February 10, 2020 12:00 AM

Outbreak of coronavirus paralyzes China's managers, who sit and wait

Falling number of new cases gives hope that market will bounce back

Douglas Appell
Christine Williamson
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    Geovien So/SOPA Images/LightRocket
    Market watchers are seeing promising signs that the infections are being contained but realize ‘we are not really out of the woods’ yet.

    Updated with a correction.

    The coronavirus that originated in the city of Wuhan at the end of December and quickly circled the globe has left asset managers in China and Hong Kong spending more time at home, awaiting signs that steps taken by Beijing to contain the threat to public health are bearing fruit.

    How soon progress on that front emerges will determine whether the hit to China's economy from the outbreak can be confined to the first quarter and then, as many anticipate, mostly offset by rebounding consumption and production later in the year.

    On that score, Beijing's latest daily statistics on the health crisis are offering some grist for the mills of bulls.

    On Feb. 7, China's National Health Commission said it confirmed 3,143 new coronavirus cases over the previous day, down from 3,694 the day before and 3,887 the day before that. As the week began, that key figure had continued to trend higher, with 3,887 on Feb. 5 up from 3,235 the day before and 2,825 on Feb. 3.

    Beijing reported 73 virus-related deaths for the latest day, unchanged from the day before after climbing steadily earlier in the week, bringing the death toll on the mainland since the crisis began to 636. And "new suspected cases," which some analysts say they're focusing on as much as confirmed cases, stood at 4,833, down from 5,328 the day before but well above 3,971 on Feb. 5.

    Market veterans called the latest numbers hopeful but cautioned it's too soon to declare victory.

    While the smaller number of new cases is "definitely positive," two days do not make a trend, said Aidan Yao, Hong Kong-based senior economist (China), macro research-core investments, with AXA Investment Managers. With millions of Wuhan residents who left the city for the Chinese New Year's holidays just returning now, "we are not really out of the woods," he said.

    Even so, many analysts remain hopeful China's government will be able to turn the corner in coming weeks — citing Beijing's muscular steps to address the crisis as well as top leader Xi Jinping's public acknowledgment that flubbing the government's response could lead to social instability.


    Quarantining Wuhan

    Perhaps the most audacious measure Beijing took has been quarantining Wuhan, the industrial city of 11 million people in Hubei province where the virus first emerged, together with a number of neighboring cities.

    Foreign money management firms, for their part, have moved to ensure their employees on the mainland or in Hong Kong don't play a Trojan horse role for the transmission of the virus in their offices, having as many as possible work from home instead.

    "I've been the only one in the office," said Tony Archer, Hong Kong-based managing director, Asia-Pacific, with American Century Investments. Hong Kong's central district has taken on the air of a ghost town, with restaurants and hotels largely empty, he said.

    AXA Investment Managers' employees on the mainland are being encouraged to "work remotely," and have been restricted from traveling to affected areas such as Wuhan and Hubei province, said Bruno Guilloton, the firm's Hong Kong-based Asia-Pacific CEO, in an email. In Hong Kong, "we have decided to implement working-at-home arrangements for all staff except those whose office presence is critical," he said.

    Employees in Matthews International Capital Management's offices in Shanghai, Hong Kong and Singapore have been advised to work from home and minimize face-to-face meetings for now, said Celine L. Colgan, San Francisco-based head of North American institutional business. Travel for Shanghai-based employees, whether overseas or to other provinces in China, is restricted, she said.

    If Beijing has locked down entire cities, meanwhile, money managers are effectively quarantining employees who have been to affected areas, or met with others who have, for the 14 days medical authorities say is the time it can take for coronavirus symptoms to develop.

    "All employees … who have been in mainland China or have been in known close contact with someone who has been in mainland China" have to work from home or not come to the office for 14 days from the time they or their close contact was last in mainland China, said Patrick Scanlan, a New York-based spokesman with Goldman Sachs Asset Management.


    Further precautions

    According to one Hong Kong-based money management executive, who declined to be named, some firms are being even more cautious, requiring employees who go through any international airport in the region to work 14 days from home.

    The crisis, meanwhile, comes at a time when market-opening steps by Beijing are offering foreign money managers new opportunities, from establishing wholly owned fund management companies for China's $2 trillion retail, mutual fund market to taking controlling stakes in joint ventures with the asset management subsidiaries of Chinese banks, recently set up at the behest of regulators to better control a wealth management industry segment exceeding 23 trillion yuan ($3.3 trillion).

    The outbreak won't derail foreign managers' long-term goals but it could force them to be more patient in pursuing them, said Natasha Xie, a Shanghai-based partner with Chinese law firm JunHe LLP.

    In a business culture where face-to-face meetings remain important, the current situation will inevitably impact the "speed you can move," agreed Thomas Cheong, Hong Kong-based president of Principal Financial Group's business in Asia. But the opportunities China's market offers will ensure foreign firms keep pushing ahead, even if there's a headwind, he said.

    Meanwhile, the coronavirus outbreak erupted just as receding geopolitical threats — such as U.S.-China trade frictions and Brexit — were boosting investors' appetite for risk assets, pushing equity markets in the region lower.

    Markets in Asia are still down, for the most part, from where they were three weeks ago when fears about the outbreak's economic fallout began to make headlines. By contrast, Wall Street, accustomed to more than a decade of extraordinary monetary policy support to benefit buying whenever the market dips, has quickly rebounded from a few sharp sell-offs to post new records.

    For now, whether it comes to clearing away the uncertainties dogging Asian markets or removing the operational hurdles the outbreak has imposed on money managers, all progress will depend on stopping the spread of the virus.


    Leveling off

    Many analysts remain optimistic new infections will begin leveling off over the next few weeks, setting the stage for a resumption of travel to and from China in the second quarter of the year and unleashing investors to hunt for bargains.

    Solid evidence that China is turning the corner in combating the coronavirus could come later in February, representing "an opportunity to lean into risk exposures," albeit in an environment that's likely to be marked by a fair amount of volatility, said Erik Knutzen, managing director and chief investment officer–multiasset class with New York-based Neuberger Berman Group LLC.

    Chi Lo, Hong Kong-based senior Greater China economist with BNP Paribas Asset Management, said if virologists are correct in thinking the coronavirus outbreak will peak in February, that could drive a sharp rebound in Chinese stock prices, together with the prices of other emerging market risk assets and commodities. If, by contrast, the number of new cases doesn't fade by the end of February or early March, investors will have to reckon with more substantial economic fallout, he said.

    Some analysts contend the risks now may be skewed to the downside.

    The economic impact of the coronavirus will depend entirely on how long the virus continues to spread, and if past instances of two to four months are any guide, the current crisis could peak in March, said Tracy Chen, a portfolio manager and head of structured credit with Philadelphia-based Brandywine Global Investment Management LLC. If so, Ms. Chen predicted China's first-quarter growth will drop to an annualized 4% from her initial forecast of 6%, followed by a "mini V-shaped recovery" that would leave full-year growth down only 30 basis points at 5.2%.

    But Ms. Chen said the damage to confidence from the huge "demand shock" that's resulted from entire metropolitan populations being put on "lockdown" could make for a weaker V-shaped recovery. The attendant halt to production has yet to produce a matching supply shock but if the virus keeps spreading — if there's a "second Wuhan, a third Wuhan, new clusters of epicenter outbreaks" — then existing inventories will deplete and economic damage will extend to the second quarter, she said.

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