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As expected, China's stock market kicked off the lunar new year with a bumpy start amid the ongoing coronavirus outbreak, with the benchmark Shanghai Composite Index dropping 7.72 percent to 2,746.61 points and the Shenzhen Component Index closing 8.45 percent lower at 9,779.67 points on Feb. 3.

Tang Yao,associate professor of applied economics at Peking University's Guanghua School of Management,described the drop as a reasonable reaction to the virus outbreak and the previous drops in Singapore and Hong Kong markets which opened earlier, stressing that the trend of quality growth of China’s stock market and its economy remains unchanged.

OUTBREAK IMPACT SHORT-TERM

Compared with the 2003 market when SARS hit, China’s stock market has experienced profound changes. For instance, nowadays the volume of stocks held by foreign investors might be close to or even greater than that of domestic stockholders. Virtually non-existent back in 2003, these long-term investors are less likely to readjust their quality stocks amid the outbreak, and thus play a role in stabilizing the market.

This time the Chinese market also went through a ten-day holiday halt,during which all kinds of signals were sent out from other countries’markets and observed by all sides. Consequently,stock prices should quickly go back to their normal levels in a short period,possibly within a week. Meanwhile, the actual extent of A-share market’s drop will lie in the adequacy of funds and traders’confidence and remain uncertain. That said, too much pessimism is unnecessary.

Many expect stocks related to the medical industry to gain. However, since the medical board had already experienced a considerable gain before the holiday and individual stocks are hugely different, it will be very difficult for general investors to ascertain which stocks will continue to climb. Some might have already hit their peak.

Tang advised investors to remain vigilant and try to distinguish different stocks in the same industry as their performances can differ hugely. He also encouraged them to be confident as valuation of the country’s stock market is still at a reasonable level.

“The current drop is a short-term phenomenon and China’s economy will not be affected by the outbreak too much in the long run,”said Tang, urging investors with adequate funds at hand to seize this opportunity to consider their options for long-term investments.“However, it goes without saying that short-term investors will bear the brunt.”

ALTERNATIVES FOR INVESTMENT

Tang said gold as an investment alternative can offset risks or an unsteady dollar when the U.S. market is in doubt. However, as risks come and go rapidly in the current environment,gold will be hard to handle in the short term.

“It is completely unnecessary for ordinary investors to suddenly buy a lot of gold in anticipation of risks and then expect a good return three months later as it will be very hard for them to pick the right time to trade,” said Tang, stressing that it will be more reasonable for mass investors to spend a small portion of their fund on gold. Even then, a one-off investment might not be the best thing to do in case one buys at a high price.

Telling stockholders not to panic, Tang recommended rational and diversified investments in a combination of options such as exchange-traded fund(ETF), bond funds and gold ETFs for those looking for investment alternatives to individual stocks.

The current bond market is relatively sound as monetary easing is widely expected after the outbreak and authorities are actively improving the mechanism to establish the loan prime rate(LPR). Also, more funds will go into the bond market in a bid to avoid risks. The bond market might not be particularly bullish,but it should still perform well in the immediate future.

Commodities are in a notable disadvantage given the slowing economy of China, a country with huge demand for them. Meanwhile, the global economy is slowing as consumer demand in the U.S. is weakening and France’s GDP shrunk in the fourth quarter. Thus,commodity prices will not have strong support.

© 2019 Guanghua School of Management Peking University