Asian equities have performed robustly in 2020 with the MSCI Asia Ex Japan index outperforming both the MSCI World and the MSCI USA. While this was helped by strong performance from China, large regional economies such as Taiwan and South Korea also contributed.
Indeed, there has been a north Asian tilt to Asian equity performance (see exhibit 1) this year, with south-east Asia and India lagging so far. This can largely be explained by north Asian countries managing the COVID-19 pandemic better.
More broadly, the exceptional fiscal and monetary stimulus to combat the economic downturn induced by the pandemic and social distancing measures have certainly helped equity market performance too. The usual fiscal norms have been pushed aside across Asia as governments attempted to offset the economic impact of the health crisis and government debt has increased substantially.
Global central bank action has been a further factor supporting Asian equity markets. Massive monetary easing led by the US Federal Reserve has enabled Asian central banks to take extraordinary measures without significant currency market ripples. Take Indonesia’s central bank buying Indonesian sovereign bonds outright. In the past, this would have caused significant capital outflows, but we have seen no capital flight.
We are cautiously optimistic about the outlook. Asia is now taking on the role of engine of global growth with China as the hub for trade in the region.
Leaders from 15 Asia-Pacific nations have just signed one of the biggest trade deals in history, seeking to reduce barriers in an area covering a third of the world’s population and economic output. The Regional Comprehensive Economic Partnership, or RCEP, marks a major step forward for economic integration in the region. It follows almost a decade of negotiations. This is the first trade agreement bringing together China, Japan and South Korea. It could add almost USD 200bn annually to the global economy by 2030.
The RCEP takes most of the existing agreements signed by the 10 members of the Association of Southeast Asian Nations — Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam — and combines them into a single multilateral pact with Australia, China, Japan, New Zealand and South Korea. By replacing a hotchpotch of separate arrangements with a single deal, RCEP brings Asia a step closer to becoming a coherent trading zone like the EU or North America, even if it is not expected to lead to large overall tariff reductions.
Asia will likely be the only region in the world with actual GDP growth in 2020 and 2021. The emergence of significant intra-Asia trade has given economies an anchor and allowed them to resist the downturn in global economic activity.
In our view, talk of a restructuring of supply chains due to Sino-US trade friction that would be detrimental to Asia as a whole is overdone. This has been a topic of intense discussion for the last two and half years, but there is currently something of a ceasefire between China and the US.
Overall, the Chinese share of global trade has increased, although the Chinese share of US trade has decreased. This partly reflects the massive expansion of infrastructure by China over the last few decades and growth of domestic consumption. As a result, some economies have actually seen their dependence on China increase.
We would expect to see some countries benefit from the need to diversify away from Chinese supplies, but the reality is that it will take a tremendously long time because of China’s massive consumption and exports. Asia ex China should benefit, but the interdependency is simply too large to change this in the medium term.
COVID-19 has significantly impacted the way we work, play and live. The impact of the pandemic clearly favours companies with the foresight to have developed an online strategy and refocused on logistics to serve digital consumers. Logistics may be unglamorous, but it is critical for an online strategy to work, not just in Asia. We expect such digitally minded companies to outperform.
The pandemic has also shattered long-held expectations that anchored companies’ earnings and valuations – for example, in real estate where office occupancy has slipped below 50% in central hubs in Singapore, Hong Kong, Beijing and Shanghai, but also in hospitality.
When looking at risk/return expectations, there is also the monetary backdrop to take into account. We are approaching a zero or negative yield world in Asia, with fixed income yields compressed to historic lows. That, in my view, leaves allocators and large investors in search of returns with no choice but to seek more risky assets such as equities.
Given the prospects for growth in the region, Asian equities look well-placed to benefit from this search for yield/returns. Our role is to identify those companies that will not just survive, but thrive in the new environment.
Not only is Asia the world’s growth engine, it is also the only region whose share of world market capitalisation has increased dramatically over the past decade and continues to rise. However, many investors remain unexposed to Asia: the region accounts for about 20% of global market cap, but for just 4% of the MSCI World index.
With growing economies and rising household wealth, Asia is home to many exciting next-generation companies that are meeting Asians’ needs. The bulk of growth and innovation will be coming from Asia. We believe it could be rewarding for investors to add to their currently underweight position in Asian equities.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
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