Covid-19 Cases Plateauing, Markets Calming. Value Opportunities Emerging.

1 min
February 18, 2020
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We said that we needed two things to be happening before engaging with markets over the Corona Virus panic. First, we had to see markets themselves begin to stabilise as distressed sellers are flushed out by asset allocators rebalancing portfolios to neutral positions and panicked ‘Mom and Pop’ retail investors retreating to cash. Second, we had to see a stabilisation at least in the actual fundamentals, the rate of growth in the number of cases. Then, we would look for some action by value investors to pick up quality names with good balance sheets that had been oversold on a cyclical panic, making a clear distinction between companies where the sudden cash flow burn would create long term damage and those where a quarter or even two of postponed rather than cancelled orders is bearable. It looks like we are at that point now.

The graph from the European Centre for Disease Prevention and Control (ECDPC) shows the latest figures (as of 13th February) for the Corona Virus COVID-19. The cumulative total is now 70548, with 1775 deaths. While the graph is distorted by the change of reporting method we discussed in a previous post, the interesting and important thing is that the number of cases appears to be plateauing. Given the lagged nature of the data, this will mean that the ratio of deaths to cases is likely to rise in the near term, but crucially the fatality rate is still in the 2-3% level, not the 10%+ levels of SARS or the 30% of MERS.

Source: ECDPC 17th February 2020

The ECDPC also noted that of the 1775 deaths reported so far, 1770 of them were in China. (note as of today the toll is 1868, with the additional numbers also all in China.)

Meanwhile markets appear to be starting to factor this in, with most indices for ‘risk’ rebounding from the recent lows since the start of the month and looking technically better supported around these levels. This should start to encourage some value investors.

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Periodically, we take the opportunity to refresh our portfolio of Themes, incorporating new ideas to replace ones that that we think are no longing offering attractive risk return opportunities. We monitor the new ideas for a period, before incorporating them when we think the risk return is attractive, guided by our confidence scoring systems. As the risk return profile more generally has improved and as we reallocate cash back into our themes, we have added two new themes from our 'watch list' - Japanese Wholesale and Trading Companies and Emerging Markets ex China. The note provides more details and background.

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