ASEAN Strategy - MERS and ASEAN equities : Impact likely to be transitory; actual bottom will depend on how much further it spreads

MERS has spread to ASEAN and is impacting stocks
The first case of Middle East Respiratory Syndrome (MERS) in Thailand was reported last Thursday. While this is not the first case in ASEAN – there has been a previous case each in Malaysia (April 2014) and Philippines (Feb 2015) – this is the first case following the new outbreak of MERS in South Korea from 20 May 2015.

Airport, hotel, airline and hospital stocks in Thailand saw a sharp correction on Friday as a result. Our transportation analyst, Tushar Mohata, has looked into the impact specifically on the airport stocks in the region (AOT and MAHB). In this note, we take a broader look at the impact on markets. It is not yet clear how much further MERS will spread in ASEAN, and we believe this is something that will require close monitoring, but we agree with Tushar and our Korea strategist Michael Na’s assessment of the situation, and believe we will see a similar opportunity to buy on dips in ASEAN. For investors able to withstand some volatility, we believe a 10% correction on single stocks offers good entry points already (all else being equal).

Estimating the impact on ASEAN equities
There are three things to consider when estimating the impact of an outbreak like MERS on equity markets.

1. Sentiment/fear more impactful
Historically, we have seen that the impact of disease outbreaks on stocks tends to run ahead of actual economic costs or impact on human life, and has a closer fit with the level of media coverage. Thus, despite the likelihood that MERS outbreaks will be contained fairly quickly, the fear and news reports of the spread are likely to mean that market impact could be felt in the short term (as is already the case in Korea, Thailand and, briefly, in Hong Kong). Should there be a further spread of MERS in ASEAN, we believe there will be further downside to related equities.

2. Temporary and one-off
As long as the outbreak is contained quickly and limited in scope, it is likely to have only a temporary impact on the stock market and thus presents a buying opportunity. This is because the impact from such outbreaks are usually limited to the demand side (i.e. not disrupting the supply side through an impairment of infrastructure or labour supply), and thus the recovery is quick. Also, given the one-off nature of such an event, the impact on stocks is likely to be more modest and short-lived than that on corporate earnings. Earnings expectations are also slower to react.

3. Magnitude and sectors of impact
Keeping the above two points in mind, the magnitude and duration of impact will depend on the severity of the outbreak, and more importantly, the severity of the newsflow about the outbreak. There is no easy way to estimate this for a potential MERS spread in ASEAN. One instructive way is to look at past outbreaks, although this is of limited utility because each outbreak is different from the other, and the market contexts also vary (in terms of valuation, participants and economic impact).

We believe the three most appropriate comparables are: 
(a) the outbreak of SARS in Hong Kong, 

(b) the first case of EBOLA in the US, and 

(c) the spread of MERS itself in Korea since last month. 

The various bouts of avian flu over the past 10 years are not good comparables given the different contagion dynamics (only contact with live birds caused infection).

Out of these, we believe MERS is likely to have a milder market impact than SARS and EBOLA (see “About MERS” section further ahead in this note), and that MERS in Korea may be the most useful as a case study. We can tentatively expect a broadly similar timeline and pattern as in Korea (assuming that the impact in Korea is indeed past its worst) – thus a roughly four-week timeframe from the first case to where the situation is under control.

Coming to the sectors, we believe the primary channel of stock market impact will be through tourism – tourist flows in both directions tend to decline as people choose to defer/cancel overseas trips, especially leisure trips – and therefore on airline and hotel stocks.

In ASEAN, these include AOT TB, THAI TB, AAV TB, NOK TB, MINT TB, CENTEL TB, OHTL TB, ERW TB in Thailand; PAL PM, CEB PM in the Philippines; MAHB MK, GENT MK, GENM MK, SHMB MK in Malaysia; GIAA IJ, PLIN IJ in Indonesia and SIA SP, TGR SP, MAND SP, HPL SP, GRAN SP in Singapore. (Read Report)

Source : Nomura Global Markets Research

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