Schroders: Impact of Chinese earthquake

An earthquake measuring 7.9 on the Richter scale hit Sichuan province in southwest China yesterday (May 12th). The origin of the earthquake was in Wenchuan county, about 100 km to the northwest of the provincial capital of Chengdu. The death toll at the time of writing was close to 12,000 and serious damage on infrastructure and buildings has been reported.

While the scale and effect of the tragedy in human terms cannot be underestimated, we do not believe that this will have a lasting impact on the economy and stockmarket.

The impact on the economy should not be significant for China, barring a major disruption on power, telecom or transportation networks. Sichuan province accounts for 4.2% of China’s 2007 GDP. We believe that the negative impact on the economy should be short-lived and rebuilding demand at a later stage will lift fixed asset investment spending. However, CPI inflation could remain stubbornly high in the next few months given that Sichuan is a hog breeding area (it accounted for 11% of China's hog production in 2006), which could drive pork prices up again. Any transportation bottlenecks resulting from the earthquake should also only have a temporary impact on food and raw material prices.

Similarly, we believe that there will only be a short-term negative impact on stocks that have operations in Sichuan province. To name a few, these include property companies that have upcoming sales in the province, life and property and casualty insurance companies that will see rising claims resulting from the earthquake, expressways companies that might face temporary road closures as well as retail and department stores operators in Sichuan.

In particular, a total of 66 A-shares (45 listed on the Shanghai Stock Exchange and 21 on the Shenzhen Stock Exchange) that are based in Sichuan province will have their trading halted until they are able to disclose the impact of the earthquake on their operations. Nevertheless, as proved with other natural disasters or epidemics, the negative impact and sentiment on these stocks should be short lived and could be buying opportunities should share prices overshoot on the downside.

On the other hand, the rebuilding demand in the province will benefit certain sectors, such as construction and building materials (cement and steel) companies. In terms of our investment strategy, we have made no changes as we were already positive about these sectors and positioned in stocks that will benefit from rising infrastructure demand in China.