Over the last few days, we have seen significant volatility across all major stock markets as we start to see the impact of the Coronavirus (Covid-19) pandemic. Businesses have been temporarily closed, investments are being held back, employees are working from home, supermarkets are being emptied by panic-buyers and the business climate has deteriorated considerably. Understandably there is a sense of panic. This week with Italy an entire democratic country has been placed under quarantine. These are unprecedented times.
Furthermore, as the virus first surfaced in China, it has hit the country particularly hard. This is critical for the global economy, as China is now the world’s largest manufacturing centre and an important source of raw materials. We believe there will definitely be an impact on global growth. While it is difficult to speculate on an exact figure at this stage, we estimate it could be around half a percent. As the crisis continues to develop in Europe and North America, it could be even higher.
Given this backdrop, the portfolio of the Mobius Emerging Markets Fund has naturally been affected. Two of our holdings in China will likely be the most impacted. One is a company active in the fast food industry (Yum China) and the other in the entertainment sector (IMAX China). Naturally, they have suffered from the quarantine measures taken by the Chinese government to contain the spread of the virus.
The recent news flow from China is more encouraging with newly reported cases declining day by day (down to 24 new cases on 11 March) and we are expecting performance to improve again. It seems China is on the road to recovery. A survey by Made-in-China.com—one of the main platforms connecting Chinese suppliers and global buyers—found that by late February, 80% of manufacturing firms had resumed operations.
Overall, the Mobius Emerging Markets Fund has been less affected by the recent volatility than others. The fund outperformed the MSCI Emerging Market Index by more than 7% in the last three months and more than 3% in the last month. If you look at the MSCI EM Mid Cap Index the outperformance is even more pronounced with 10.7% and 5.9% respectively. We are looking to utilise our current cash levels to increase exposure to certain holdings that are now trading at heavily discounted valuations. We are in regular contact with all company management and continue to monitor the portfolio closely.
As fundamental investors we take a long term view. Our investment horizon is 5+ years. Despite the mounting number of people infected and the worrying death toll, we believe the impact will diminish over time and the virus will eventually be contained. A tremendous amount of resources is currently being devoted to prevent the spread of the virus and at developing a vaccine.
Generally, the case of the Coronavirus is a reminder of how volatile markets can turn over night. As investors we have to be prepared. Portfolios that are globally diversified address this kind of risk and are in a much better position when such events occur.