Markets ‘acting rationally’ amid coronavirus – Goldman Sachs

Goldman Sachs said the recent recovery in markets following the initial jitters over coronavirus “looks rational, even though it appears early” as investors look at patterns from past outbreaks.

“Investors are surprised how quickly markets have recovered, especially given newsflow regarding the impact of the virus on economic activity. Despite this, we believe markets are acting rationally,” Goldman Sachs said in a note.

The Wall Street Bank pointed to “widespread awareness in previous outbreak episodes, markets tended to trough when the momentum of new infections peaked” referencing Severe Acute Respiratory Syndrome in 2003. The note highlighted that the rate of new confirmed cases of coronavirus had moderated since February 5.

China reported the total number of coronavirus cases passed 60,000 to the end of Thursday after new counting methods included cases that have been clinically diagnosed but had not undergone laboratory testing. There have been a total of 1,380 deaths from the virus.

Investors are incentivised to move early as five previous virus outbreaks saw a strong post-trough performance, the bank said. For Asia, that represented an 18 per cent and 23 per cent rebound from the trough at 3 months and 6 months post-outbreak.

However, Goldman cautioned that markets might be “overly optimistic” about the potential upside as valuations are high compared to previous outbreaks and the “macro environment is somewhat less supportive of a strong market rally” thanks to the US-China trade war and lower growth in China compared to 2003.

The CSI 300 of Shanghai and Shenzhen stocks was up 0.8 per cent on Friday, down 5.1 per cent from mid-January after falling sharply when trading resumed after the lunar new year break. Hong Kong’s Hang Seng was up 0.6 per cent trimming losses from a January peak to be 4 per cent low from an almost 10 per cent fall between January 17 and January 31.

Goldman pointed to consumer discretionary stocks such as restaurant chain Xiabuxiabu Catering or and airlines including Air China and China Southern Airlines as “attractive recovery candidates”. Developers, banks and machinery manufacturers stand to benefit most from virus-related government stimulus.

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