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Is the mystery Chinese virus a cause for alarm?

  • A virus outbreak has made an unexpected dent in the 2020 rally in China.

  • Consumer shares were at the forefront of losses on the FTSE China A50 Index today.

  • At least four people have died since it was first detected in December.

Is the mystery Chinese virus a cause for alarm?
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

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Tellimer Research
21 January 2020
Published byTellimer Research

"Never waste a good crisis" – Winston Churchill

A virus outbreak has made an unexpected dent in the 2020 rally in China. The virus is known as 2019-nCov (novel contravirus). At least four people have died since it was first detected in December. 

It was first detected in Wuhan in Central China. There are early signs that it can be transmitted from person to person. 

Consumer shares were at the forefront of losses on the FTSE China A50 Index today. The index is down 2%, but food and travel stocks were down as much 5%. The Yuan has slid by 0.5%.

The outbreak raises questions for the Asian food sector, particularly the meat sector. This sector is vulnerable as consumption can fall sharply.

The SARs crisis of 2003 and the Bird Flu outbreak in 2006 had a short sharp impact on the earnings of Asian meat stocks. The impact was felt for a couple of quarters, after which there was a rapid recovery. In the case of Charoen Pokphand Indonesia (CPIN IJ, Not Rated), Japfa Comfeed (JPFA IJ, Not Rated) and Charoen Pokhpand Foods (CPF TB, Buy, TP THB38.0), operating earnings fell by an average of 67% during SARs and 53% during the Bird Flu outbreak. However, operating earnings were back at pre-crisis levels after two quarters.

Charoen Pokphand Indonesia - net income (IDRmn)

 Charoen Pokphand Foods – net income (THBmn)

Japfa Comfeed – net income (IDRmn)

Source: Bloomberg

This suggests that public health standards in Asia have successfully dealt with similar outbreaks in the past. The alarm that may sound this time could be an opportunity to accumulate a sector that is directly exposed to the region's protein boom.