22 October 2016
Chinese tourists wear face masks as they pose for a selfie in Seoul, South Korea. Market concern over the MERS outbreak appears tame. Photo: Bloomberg
Chinese tourists wear face masks as they pose for a selfie in Seoul, South Korea. Market concern over the MERS outbreak appears tame. Photo: Bloomberg

What impact will MERS have on Chinese stocks?

The market has widely anticipated the move by US index provider MSCI Inc. to put on hold its decision on whether to include China A shares in its Emerging Markets Index.

Equity markets responded with little fluctuations in Wednesday’s morning trade. Investors believe that A shares’ inclusion in the widely tracked index is just a matter of time.

It looks like the bull market is here to stay for a while.

Looking at the constituents of the Shanghai Composite Index, as many as 686 stocks posted rallies, 274 declined and 134 were unchanged. Among the gainers, 79 stocks surged over 7 percent.

And in another sign of the market’s resilience, more stocks hit the daily up-limit than those that touched the daily down-limit.

Nuclear plays lost some of their recent gains on Wednesday. China First Heavy Industries (601106.CN), Shanghai Electric Group (601727.CN), Dongfang Electric Corp. (600875.CN) and Zhejinag Zheneng Electric Power Co. (600023.CN) posted losses.

On the other hand, China National Nuclear Power Co. (601985.CN) closed at 4.88 yuan on its trading debut, representing a 44 percent premium over its offer price.

Seven other new shares posted similar increases on their first day of listing, further stoking investor interest in new listings.

Meanwhile, the expensive growth enterprise board continued its rally, ending the day with a 3.49 percent rise despite profit-taking by some major shareholders.

These stocks are relatively immune to the impact of the broad economic slowdown and rely less on macro policy support.

By contrast, main board plays are more sensitive to macro factors.

As such, market divergence is likely to occur and stocks with high valuation and poor earnings may face sell-off pressure.

Airline plays unaffected

A woman from Tsing Yi suspected of MERS infection sparked panic reaction in Hong Kong on Wednesday.

Chinese officials admit there is increasing risk for the virus to spread in China due to the country’s frequent interactions with South Korea and Middle East.

Stocks related to the control of the virus might be sought after by investors, especially if the situation worsens. Shanghai Kaibao Pharmaceutical Co. (300039.CN) has already surged nearly 60 percent since May.

Usually, airline stocks are weighed down by reports of disease outbreaks. But market concern over the MERS outbreak appears to be tame as Chinese tourists simply avoid going to South Korea and change their travel plans.  

Airline plays remain robust amid strong travel demand and low oil prices.

China Eastern Airlines (600115.CN) once hit the daily up-limit on Wednesday, but the rally eased to 6.6 percent at the close.

China Southern Airlines (600029.CN) jumped over 9 percent during intraday trading but ended up 1.6 percent higher.

Air China (601111.CN), Spring Airlines (601021.CN) and Hainan Airlines (600221.CN) all posted a similar trajectory.

Investors should pay close attention to the latest developments on the MERS virus.

This article appeared in the Hong Kong Economic Journal on June 11.

Translation by Julie Zhu

[Chinese version中文版]

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Department of Investment Analysis at HKEJ

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