Over the last few days, it seems as if global investors outside China have suddenly woken up to the economic threat posed by the coronavirus, more than a month after the virus became widely reported.
11 February 2020 | Roger Montgomery (Image: Alibaba)
The Montgomery Global Funds sharply reduced our China exposure in January, but nonetheless some of our remaining Chinese exposure have warned of the adverse business impacts stemming from COVID-19.
However, should investors blindly rush for the exits in panic, or is there a silver lining to the current epidemic?
In terms of warnings and downgrades, Apple warned last week that it would miss its already-cautious revenue guidance for the March quarter due to weak demand in China and supply chain disruptions.
Alibaba, during its December quarter earnings call, issued a material downgrade to its March quarter revenue guidance. And the Asian life insurers the Funds own are likely to see weak premium growth due to the travel restrictions and non-contact work policies.
However, these negative short-term impacts arising from the coronavirus need to be balanced against other potentially positive considerations that may take longer to play out. For example, Alibaba management noted that demand on its e-commerce platforms for FMCG, consumer staples and especially groceries was strong, in large part driven by consumers’ self-imposed quarantines and fear of leaving their apartments.
Indeed, the circumstances are likely to encourage those who haven’t yet adopted e-commerce or are infrequent online shoppers to try or use e-commerce more often. If this consumer behavior sticks beyond the duration of the epidemic, it may be a long-term driver of incremental growth for Alibaba. This is especially true for online grocery, where even in China’s e-commerce saturated Tier 1 cities, penetration of online grocery remains low.
For the life insurers, the coronavirus experience is likely to persuade the population to give greater consideration to health insurance, critical illness and protection-style life insurance products, where penetration is lower than in western countries, and may catalyse faster adoption over time.
An absolute increase in the adoption of life insurance and a mix shift towards protection products will provide a double benefit, as protection products can be up to 5 or 6 times more profitable than savings products. Even for Apple, weak iPhone performance for the next several quarters (if the supply delay is not recovered) may actually set up a larger upgrade cycle for the first 5G iPhone in September 2020.
Ultimately, while the coronavirus has taken and is still taking an untold human toll globally, investors should remain rational about the potential negative impacts and carefully weigh them against the longer-term silver linings that may be less immediately obvious.
Roger Montgomery is the Founder and Chief Investment Officer of Montgomery Investment Management which has A$1.44 billion in funds under management
DISCLAIMER: The Montgomery Global Funds and Montaka own shares in Apple and Alibaba. This article was prepared 28 February with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek independent financial advice.