The new coronavirus from China is weighing on a variety of Chinese assets, including some well-known internet equities. The first documented case of the deadly respiratory illness was reported just over a month ago and during that time, the Global X MSCI China Consumer Discretionary ETF (CHIQ) is off 5.64%.
However, CHIQ jumped 3.77% last week and some analysts believe the coronavirus could eventually prove to be a long-term catalyst for some of CHIQ’s holdings.
“We think the main long-term beneficiaries of the coronavirus outbreak are Chinese Internet companies with online products and services that are not yet well penetrated, as they could see an increase in users,” said Morningstar in a note out last Friday. “This includes companies offering online education, fresh food delivery, and office tools, which are likely to see faster adoption rates.”
CHIQ’s underlying index “incorporates all eligible securities as per MSCI’s Global Investable Market Index Methodology, including China A, B, and H shares, Red chips, P chips, and foreign listings, among others,” according to Global X.
Buying Into The Dip
Companies such as Baidu.com (NASDAQ: BIDU), Alibaba Group Holding Ltd. (NYSE: BABA) and Tencent (OTC: TCEHY) are major drivers of China’s sprawling Internet market. Alibaba alone represents over 10% of CHIQ’s roster.
Based purely on sheer size, China’s Internet and mobile phone markets are substantially larger than those in the U.S. Additionally, brick-and-mortar infrastructure is slack in China, a sign that up-and-coming Chinese consumers are adept at and prefer to buy online.
“Should the users of these services and products like the experience, their habits can be cultivated with relatively low acquisition costs, providing long-term benefits. E-commerce, which is not well penetrated in lower-tier cities and rural areas, should also see faster adoption rates in the long run,” according to Morningstar.
Adding to the case for CHIQ, China has been looking to increase internal consumption to reduce the economy’s sensitivity to exports, and those efforts appear to be paying dividends. While some data points indicate the Chinese economy and consumer spending are slowing, policymakers remain proactive.
“The impacts of the coronavirus outbreak on the e-commerce sector are more positive than negative in the long term, mainly due to faster penetration of online shopping into lower-tier cities and rural areas, and into groceries and fresh food, with Alibaba and JD.com the main beneficiaries,” notes Morningstar.
Alibaba and JD.com (NASDAQ: JD) combine for over 18% of CHIQ’s weight.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.