We are closely monitoring the coronavirus outbreak and its impact on global markets as this dynamic situation continues to unfold. As it would be impossible to predict a specific scenario or outcome, we are continuing to conduct rigorous fundamental research and evaluate portfolio holdings on an individual basis using the information that is currently available. This includes discussions with companies as well as reviewing the disclosures that many of the companies are making which address both the impact on their employees and operations as well as on the demand outlook for their products and services.
Experience has taught us that global market shocks have generally created opportunities in specific businesses or entire sectors, especially for patient investors that are able to take a longer view. Therefore, while much has been written (and will likely continue to be) about the potential short-term economic impacts of the spread of the virus, it is unlikely that you will see a commensurate level of activity in the portfolios that attempts to outmaneuver it. However, to the extent market volatility increases in the way it has over the past few days, it may give us an opportunity to purchase businesses at what we believe are discounted prices that continue to have attractive long-term prospects.
As it relates to the coronavirus epidemic, while the Chinese government’s reaction and measures to stem the spread of the outbreak appear quicker and more forceful than its slow and less transparent approach to SARS, it is important to remember that China is much more integrated into the global economy than it was during the SARS outbreak in 2002-2003.1 Not only are more Chinese travelling now than they were during this previous period, but the critical role many Chinese companies play in global supply chains in industries ranging from electronics to autos to healthcare equipment cannot be understated. Finally, from an equity market perspective, the weight of China in the MSCI Emerging Markets Index now stands at approximately 34%, a sharp increase from 7% seen during the SARS outbreak.2
While a great deal of focus has initially been on China and the impact of the spread of the virus – and the resulting quarantines – on its economy, we continue to assess the second and third order impacts on industries and economies around the world. Consumption has played an increasingly larger role in the Chinese economy in recent years3 and, therefore, we would expect that there will likely be weakness in Chinese gross domestic product growth in 1Q20, possibly extending to 2Q20. However, an even more important issue may be what this weakness does to other economies around the world as China has been a major driver of global demand for products ranging from oil and gas to agricultural commodities to luxury goods for the better part of the last decade. Importantly, as the number of cases of coronavirus has begun to increase in countries such as South Korea and Italy, concerns have become elevated due to the importance of the manufacturing bases within these countries and their corresponding impacts on regional and global economic growth.
Given the widespread fear and the corresponding negative impacts to consumer confidence and economic activity (at least in the short-term), it is reasonable to expect that some of our estimates of business values may decrease as we receive new information and incorporate it into our assessments of intrinsic values. However, our experience tells us that price declines during market shocks such as this have tended to be much more exaggerated than any actual decline in fundamental intrinsic company values. In our opinion, while the increased volatility may be unsettling in the short-term, investors may be best served by avoiding indiscriminate selling and instead look to purchase (or increase exposure to) companies that appear well positioned for years to come.
1 Source: Forbes, January 29, 2020, “As Coronavirus Fears Spread, What’s the Breaking Point for Markets?”
2 Source: MSCI via FactSet; weightings as of 3/31/03 (7%) and 12/31/19 (34%).
3 Source: The World Bank as of 12/31/18.
The MSCI Emerging Markets Index with net dividends captures large and mid cap representation of emerging market countries. MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products.
The information provided in this material should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any security transactions, holdings or sectors discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance discussed herein. Strategies discussed are subject to change at any time by the investment manager in its discretion due to market conditions or opportunities. International and emerging markets investing is subject to certain risks such as currency fluctuation and social and political changes; such risks may result in greater share price volatility. There is no assurance that a forecast will be accurate. Because of the many variables involved, an investor should not rely on forecasts without realizing their limitations. The Brandes investment approach tends to result in portfolios that are materially different than their benchmarks with regard to characteristics such as risk, volatility, diversification, and concentration. One cannot invest directly in an index.