The black swan is back—maybe.
During the stock market collapse of the Great Recession, it became popular to talk about “black swan events”—events that could not be foreseen, and had severe negative effects.
The question being raised today is whether the so-called Wuhan virus is this decade’s black swan. Certainly, the rout of casino stocks led to such immediate speculation, along with fears that Macau’s Chinese New Year would be wrecked by gamblers staying home, out of the way of the virus.
The first four days of headline scares slam the five Hong Kong-listed, pure Macau play casino stocks. Sands China fared the best, down 9.3 percent. The others all tumbled by double digits, with MGM China the worst, falling 16.1 percent. Melco Resorts, trading in New York, did nearly as poorly, down 15.2 percent.
The American parents in Macau, with operations outside the region as cushions, fared better. Las Vegas Sands slipped 6.22 percent, and MGM Resorts 6.43 percent. Wynn, the most Macau-dependent of the three, suffered the worst, dropping 8.25 percent.
Obviously, there’s a lot of uncertainty. But one known is the cancellation of Chinese New Year celebrations in Macau, even though casinos remain open for now and the city is not shutting out visitors.
The only precedent for the Wuhan virus is the SARS epidemic of 2003, when visitation fell 35 percent. However, SARS was closer to home, with a serious outbreak in Hong Kong. So far, the new virus has been contagious only in distant Wuhan, with other cases isolated to persons having traveled from that city.
Perhaps the biggest difference has been the swift and strong response by local and Chinese national governments, with Wuhan residents not allowed to travel and, in casinos as an example, all visitors being health-checked before being allowed to enter.
So, the question for investors is how stock prices will be affected. In 2003, business bounced back quickly. That could happen again. On the other hand, the immediate impact could be more severe if casinos are forced to close (they remained open in 2003).
Felicia Hendrix of Barclays has tried to quantify the damage by likening it to days lost. The stock declines from last Monday through Thursday imply 10 to 25 lost business days, Hendrix said. For Las Vegas Sands and Wynn, the impact has been like losing 10 to 14 days, for MGM more like 25.
The situation could present investors with a risk/reward case study. If 2020 turns out like 2003, the sell-off might create a great buying opportunity. But if the Wuhan virus turns into a disaster—well, that’s the risk.
Interestingly, even given the current sell off and the uncertainty, all the Macau operators are up double digits from their lows of last summer, led by SJM up 30 percent.
The other pure plays:
Galaxy + 26.8 percent
Sands China +24.4
Wynn Macau +23.2
MGM China +13.4
That run has been fueled by the belief that Macau is coming back, with the ever-growing number of affluent Chinese eager to spend, and with new hotel and gaming capacity coming online from all the operators.
The long-term prospects are that China’s affluent will continue to grow and spend, including gambling in Macau.
The near term is another matter.
