NS Capital Alpha Ring Manager thoughts on the Coronavirus
Communication conducted on February 26, 2020
As the headlines continue, in addition to the recent stock market declines, we thought it worthwhile to communicate with the Alpha Ring Managers and get their perspectives on the Coronavirus. We asked the following questions:
1. Are you more concerned of its potential impacts since our last conversation?
2. Do you view this as a more longer-term issue than previously thought?
3. How are you factoring its potential impact into your company analysis?
4. Are you viewing the recent decline as a buy opportunity?
Below is a sampling of their responses:
Dan Lysik (Miller Value Partners/Domestic Small Cap)
With below historical global GDP growth of 2%, there is obvious fear out there, like last year’s tariffs, of this potentially spreading and eventually causing a global recession. Today, I view this as a headwind to near-term growth which likely will lead to greater global stimulus. However, the market appears to be already discounting a lot of this fear given where interest rates are today (very similar to 2016 Brexit fears and already assuming additional rate cuts). It my opinion, like August 2019, it will eventually create a very attractive buying opportunity.
Matt Haynes (1949 Value Advisors/ International Small Cap)
The data on Covid-19 is fluid, with one of my takeaways being that China in this case seems to have better and more reliable statistical data than outside of China. I am growing more concerned as the numbers outside of China have inflected as various countries get serious about testing for it, versus viewing illness as typical seasonal ailments. I think China’s early actions to contain it may result in China’s early emergence from further confirmed cases in time, but too early to act on that belief.
Matt Haynes (1949 Value Advisors/ International Small Cap)
When we spoke, I believe my attitude was rather sanguine on the topic, but in the days since I have come to appreciate the broader threat it poses to ex-Chinese growth (developed markets’ GDP are ~60-70% personal consumption and if consumer behaviors change to avoid infection, this will dent consumption outside of basic goods), corporate profitability (supply chains are absolutely being disrupted, and the verbiage on Q4 earnings calls to date express worry but little concrete impact to financials yet – beware Q1 reporting season in May/June).
Peter Thompson (Coho Partners/ MultiNational)
Clearly it has gotten worse. I am honestly not worried about it here in the USA because our healthcare system is so much better than China’s. It is very hard to factor this in, but clearly supply chains will need to be altered. That is why good companies have numerous suppliers…for just this reason. Managements have been getting the Coronavirus question in all quarterly calls and no one has yet to say it is a real issue.
Marcelo Lima (Heller House/ Global Opportunistic)
The SARS-CoV-2 (which causes the COVID-19 disease) infection rate seems to be leveling off in China but is still growing quickly outside of China. Very likely, it will be designated a global pandemic and will be something we'll have to live with, like the flu. The world has seen this before, but there are big differences between past pandemics and this one. In 2002 when SARS began to spread, it took 20 months between sequencing the virus's gene to starting work on a vaccine. With SARS-CoV-2, we've compressed that timeframe to just 3 months. If all goes well, we'll have a tested and working vaccine in 12-18 months (this is a vast acceleration compared to the history of vaccine development).
Nels Wangensteen (MayTech Global/ Emerging Markets)
According to the data that has been released, the case growth in China seems to be under control. We still think that by March 9th schools and businesses will begin the process of starting back up. Obviously, some already have. Restaurant and travel businesses are going to have a bad quarter, but we don’t see anything that suggests that people will permanently stop traveling or dining out after the virus. There will be some supply chain disruption, but this too will get resolved.
Nels Wangensteen (MayTech Global/ Emerging Markets)
The spread of the virus outside of China is of course what is driving the news cycle and the market. The virus is very contagious but not virulent for most of us. About 85% of the people who get the virus have flu symptoms and recover. About 15% need to be hospitalized for about 14 days which puts a strain on hospitals and about 1 to 2 percent die. The biggest concern will be Sub-Saharan Africa where the population is already suffering from other diseases such as HIV or Ebola.
Marcelo Lima (Heller House/ Global Opportunistic)
I don't have a crystal ball; anything can happen to stock prices in the meantime. But usually, markets tend to discount outcomes in advance. Which is to say that any whiff of economic slowdown tends to hammer stock prices at first, and glimmers of a recovery are usually followed by a quick snap-back.
Matt Haynes (1949 Value Advisors/ International Small Cap)
I plan to be disciplined and gradual in further deployment, given the elevated level of aggregate market indices around the world, and the fluidity of the virus situation. Stocks could recovery quickly if virus data slows (unlikely I think, given the most recent developments) or this could be a triggering event for a full-blown recession if consumers stop dining, traveling, and shopping due to virus fears in addition to factories remaining shut down for an extended period.
Concluding Thoughts
NS Capital Alpha Ring managers are paying close attention. In fact, most are tracking the top epidemiologists to stay “up to the minute” informed. At present, all view this as a shorter-term negative situation and one that may present an attractive buying opportunity…but only time will tell. Of note, no holdings in the Alpha Ring have been sold due to Coronavirus fears. The Investment Committee is pleased with the efforts being exerted by the managers to study this unanticipated global shock and we are confident they will thoughtfully react as further data is released. We will continue to keep you informed as future developments unfold.
Disclaimer
Opinions expressed herein are subjective viewpoints, they are based on current market conditions, trends or expectations in connection with the financial markets or the global economy and are subject to change.