Please ensure Javascript is enabled for purposes of website accessibility

The Worst Mistake China Stock Investors Can Make Right Now

By Jeremy Bowman - Updated Feb 13, 2020 at 9:10AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The new coronavirus has shaken markets, but this is not a time to overreact.

It's a tricky time for China stock investors, and there's a big reason why.

The coronavirus has put much of the country on lockdown. Schools are closed. Many restaurants have temporarily shuttered their locations, and employees who can are working from home. In Wuhan, where the outbreak started, Chinese authorities are rounding up sick people and putting them in quarantine centers to prevent the disease's spread.

Globally, the coronavirus has killed more than 1,000 people and infected more than 40,000, and the World Health Organization has called the outbreak a global emergency. On a humanitarian level, the coronavirus is a crisis and a tragedy. But for investors it presents a different set of challenges. 

A Chinese man getting an injection at a medical clinic.

Image source: Getty Images.

To sell or not to sell

The initial impulse in a situation like this is to sell stocks most at risk of being affected by the outbreak, namely Chinese stocks and others that do business in China. Starbucks (SBUX 3.87%), for example, said that it had closed about half of its stores in China, which would have a material impact on its results. Nike and Apple issued similar statements.

However, the market's response has been anything but predictable so far.

The S&P 500 sold off over the last week of January, but has since recovered those losses as the market now seems to believe that the coronavirus threat is under control. The index is back at all-time highs. China-related investments like the iShares MSCI China ETF (MCHI 2.76%), which holds popular China stocks like Alibaba (BABA 4.92%)Tencent (NasdaqOTH: TCEHY), Baidu (BIDU 3.56%), and JD.com (JD 3.41%), has moved similarly, though the ETF fell significantly further and hasn't recovered its losses since the outbreak gained attention.

MCHI Chart

MCHI data by YCharts

According to the chart above, it looks like the worst of the outbreak's impact on the market may have passed, though the news could change quickly.

The law of unintended consequences

Though the coronavirus is hampering the Chinese economy, not all Chinese companies are suffering. In fact, some are seeing a boom in business from the outbreak. Demand for online grocery and e-commerce has surged as homebound Chinese consumers rely on online delivery to get the things they need. According to CNBC, JD.com has seen deliveries to the average apartment complex in Beijing rise from 140-150 before the outbreak to more than 200. The company also said its grocery delivery unit, Dada, which partners with Walmart, saw deliveries more than quadruple over the Lunar New Year holiday. Alibaba's Hema supermarket business has seen a similar spike in online orders.  For both companies, those shopping habits could persist even after coronavirus fears taper.

Similarly, shares of Youdao (DAO -1.29%), the Chinese online education service, spiked 80% in just two days recently on hopes that school closures across China would encourage enrollment in its online courses. There was no hard news driving that jump, which seemed to be entirely trader-driven, but nonetheless, Youdao and other Chinese online education companies like New Oriental Education and TAL Education Group could benefit from schools being closed.

The worst mistake China stock investors can make

Given the general unpredictability when it comes to the coronavirus, how difficult it is to gauge the market's response to the outbreak, and the fact that some Chinese stocks seem to be benefiting in some ways from the lockdown situation, the worst thing China stock investors can do right now is to panic and sell.

While the disease remains a threat, the initial headline risk that came when the outbreak first made news seems to have passed.  Since investing in China carries certain risks that U.S. stocks do not, investors in the country are likely more risk-tolerant than the average investor, and are used to macro issues like the trade war and economic data buffeting Chinese stocks. Investors in China should continue to monitor the news concerning the virus and its spread, but it also seems like the market has mostly priced in the impact so far. For now, there's no reason to panic. Unless it directly impacts your investing thesis for a given stock, the coronavirus alone is not enough of a reason to sell.  

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$151.34 (3.56%) $5.21
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$78.11 (3.87%) $2.91
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$49.18 (2.46%) $1.18
JD.com, Inc. Stock Quote
JD.com, Inc.
JD
$64.01 (3.41%) $2.11
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$117.62 (4.92%) $5.51
iShares Trust - iShares MSCI China ETF Stock Quote
iShares Trust - iShares MSCI China ETF
MCHI
$55.81 (2.76%) $1.50
Youdao, Inc. Stock Quote
Youdao, Inc.
DAO
$5.36 (-1.29%) $0.07
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$123.72 (0.08%) $0.10
Apple Inc. Stock Quote
Apple Inc.
AAPL
$141.66 (2.45%) $3.39
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$112.91 (4.55%) $4.91
New Oriental Education & Technology Group Inc. Stock Quote
New Oriental Education & Technology Group Inc.
EDU
$19.85 (4.58%) $0.87
TAL Education Group Stock Quote
TAL Education Group
TAL
$4.94 (2.49%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
321%
 
S&P 500 Returns
111%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.