Putting the Coronavirus in Perspective: Hong Kong and Chinese Stocks

The number of confirmed infections of the coronavirus in mainland China crossed above 24,000 on February 5, having already surpassed the total number of severe acute respiratory syndrome (SARS) cases from 2003. Because the coronavirus has a longer incubation period than SARS and is presumably easier to transmit, we may not yet have reached the outbreak’s peak.

There are a couple of positive developments, however, that give me optimism. The number of people who have recovered from the virus is now almost double the number of people who have died as a result. In addition, a potential vaccine against the virus took a giant leap forward this week, with a leading British scientist reporting that he may be ready to start testing on humans as early as this summer, according to Reuters.

Leaving aside for a moment the tragic loss of human life, investors in our China Region Fund (USCOX) may have questions regarding the epidemic’s impact on the fund’s holdings. I’ll get into greater detail below, but for now I’ll say that I don’t expect the coronavirus to have a long-lasting or substantial effect on Asian stocks. The SARS outbreak, as you can see, pounded Hong Kong equities, which rallied strongly once the number of new confirmed and suspected cases began to slow.

Short-Lived SARS Effect on Hong KonG Stocks
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Although past performance does not guarantee future results, we’re already seeing buyers come back into the market, with Hong Kong-listed stocks up for the past three days through February 5.

Positioned to Dodge the Worst of It

We expect the virus’s impact on USCOX to be minimal, relative to some other Asia-focused funds, for two primary reasons.

One, the fund’s benchmark is the Hang Seng Composite Index (HSCI), the constituents of which trade on the highly-developed Hong Kong Stock Exchange. Hong Kong-listed stocks have not seen as dramatic a selloff in response to the coronavirus as those listed in mainland China, specifically in Shanghai and Shenzhen. On Monday, February 3, when Chinese markets reopened following the Lunar New Year holiday, the Shanghai Stock Exchange Composite Index lost 7.7 percent, the Shenzhen Component Index as much as 8.4 percent. The HSCI, meanwhile, increased 0.17 percent.

And two, USCOX has limited exposure to the hardest-hit sectors and industries, including retail and travel. As of December 31, 2019, the fund’s largest sector allocation, accounting for 37 percent, was financials, followed by consumer staples at 20 percent.