With the deadly Coronavirus outbreak continuing to spread and countless US companies let alone Chinese firms suspend business in China, even though the true extent of that effect is yet to be known, it’s clear there is going to be some economic effect from this disease.
Like it or not, we all live in a world that is becoming increasingly more interconnected and interdependent. This is the same reason a disease like Coronavirus is so quick to spread around the world and why the impact on stocks is not going to be limited to those firms based solely in China.
This makes it even more difficult for investors to truly determine what is safe and what isn’t in the stock market right now. However, we do have some low hanging fruit in terms of what you should not own at this time.
The first Exchange Traded Funds you should be avoiding right now are going to be the pure-play Chinese equity ETFs. The iShares MSCI China ETF (MCHI) or the SPDR S&P China ETF (GXC) should be on your sell list or high on the list of what not to buy. These funds invest in Chinese equities and don’t favor one sector more than others. The longer the ‘quarantine’ periods last in the different provinces in China, the more these ETFs are going to be hurt, end of story. However, these could be two outstanding options if you are looking to buy back into the Chinese markets once the Coronavirus scare dies off.
Furthermore, ETFs such as the Global X MSCI China Consumer Discretionary ETF (CHIQ) may want to be avoided. This ETF focuses on the Chinese consumer. With the quarantine in effect in certain parts of China, it's not hard to see how the consumer may be finding it difficult to spend. At the same time, some of the stocks in this ETF are internet-based companies, and perhaps spending online was all the quarantined consumers did. Although that may have been hard since most of them missed substantial time at work, they may have also lost a large amount of pay?
Speaking of missing time at work, vacationing in China has not been high on many people's lists over the past few weeks. So, you may also want to start avoiding the travel industry stocks.
ETFs like the Invesco Dynamic Leisure and Entertainment ETF (PEJ) which owns airlines, hotels, restaurants and casinos is likely going to see some downturn due to speculation of weaker quarterly results because of the lack of interest in traveling to China.
Another big travel ETF that is likely going to get crushed when earnings come out is the SPDR S&P Transportation ETF (XTN). The ETF has 25% of its assets in airline stocks. While most of the airlines in the ETF didn’t have massive exposure to China, the airlines, for the most part, all completely cut service to China due to lack of demand. This low demand could take months to come back, meaning that even once the airlines begin flying to China, they may be doing so at a loss to keep loyalty customers from going to a different carrier. Some of the other travel-focused ETFs will also be hit, but it will all depend on how much exposure they have to the airline industry.
Finally, investors want to watch for how much exposure US-based companies they own have to China. Firms like Disney (DIS) shut down two of their theme parks in Asia, while Tesla (TSLA) and Apple (AAPL) shut down facilities in the country during the outbreak. While the overall impact on the bottom line for these companies may be small, there will likely be some impact. And once we gather together all the US-based companies that have a little effect from this event and combine them into an ETF, we could see a larger impact on our portfolios. So even the very popular SPDR S&P 500 ETF (SPY) may see further declines directly related to the Coronavirus outbreak in China.
Investors need to remember these types of events happen and in the long run, the markets bounce back. Thought the extent to which this event affects you and your portfolio could be directly related to how well you understand what it is you actually own.
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.