Throughout the COVID-19 pandemic, both last year and into 2021, we foresaw a divergence in the performance of Asian equity markets. In 2020, East Asian markets with superior pandemic containment measures and relatively higher inoculation rates led the region, while ASEAN countries lagged due to concentrated urban populations, limited access to vaccines, and less developed healthcare infrastructure.
Looking at year-to-date market performance in the region (September 24, 2021), we saw some changes within the market dynamic. Some North Asian markets (e.g., Taiwan) have continued to perform well while others have fallen. India has emerged as the best-performing regional market, rebounding after experiencing a second COVID-19 outbreak earlier in the year. Meanwhile, ASEAN markets have posted marginally negative performance.
Asian equity market performance, 2021 (year to date)
The rest of 2021: growth divergence expected to continue
After a sharp recovery from the pandemic-driven collapse in economic activity so far, we expect growth—both globally and across Asia-Pacific—to moderate throughout the rest of 2021. The resurgence of COVID-19 cases, particularly in India, has deferred the highly anticipated economic recovery to the latter part of the year. Even then, hopes of a significant recovery throughout the remainder of the year depend greatly on inoculation rates and each country’s ability to contain the spread of new variants.
On the policy front, the U.S. Federal Reserve adopted a more hawkish tone at its June policy meeting² and might begin the long process of tapering its monthly asset purchase program. This is likely to be one of the most closely watched events moving forward. Other major central banks have also indicated a shift toward a tightening bias.³
Our current macro assessment: monetary policy and inflation
In our view, most market participants aren’t yet ready for tighter monetary policy globally. This is evidenced by companies with negative free cash flow trading at the highest price-to-book values, relative to the market, in the past 20 years. In our view, the market may be pricing in excessive optimism in regard to these companies, relying on growth fueled by external capital instead of organically generated cash flows; however, these valuations may be challenged as bond yields rise.
Inflation may also prove challenging for some companies: Rising raw material prices, freight costs, and the reduced supply of electronic components and semiconductor chips in the first half of 2021 are expected to place pressure on the earnings of certain downstream industries. However, we think the impact of cost-push inflation will ease when supply chains across different regions return to a more normal level.
China: opportunities amid increased volatility and a shifting regulatory landscape
Looking ahead, China’s economic agenda will likely center on the development of advanced technology, the real economy, industrialization, and decarbonization. These are areas where we anticipate policy tailwinds.
For example, we have a positive stance on China’s renewable energy sector—especially companies in the power-grid network and solar-energy supply chain—where we see strong structural growth potential, driven by the government’s goal to reach carbon neutrality by 2060.
Similarly, we expect 5G infrastructure to unleash the potential of segments such as industrial automation, autonomous driving, smart cities, and artificial intelligence—such development is expected to drive demand for cybersecurity software and services. This area remains underappreciated, in our view.
We also see opportunities in regions outside of China, namely Europe, the United States, and other emerging markets. This includes companies exposed to the recovery in consumption and investments.
Technology in Taiwan and South Korea
While investors may be concerned about short-term weakness in the tech cycle, we believe the long-term growth outlook for the sector in Taiwan and South Korea remains promising. We expect another round of tech product upgrades to occur in 2022, as tech bellwethers introduce new chips and software that must be supported by new product specifications. Furthermore, the deployment of 5G-related applications remains at a nascent stage of growth, and we believe that momentum will gather pace in 2022.
India: a slower rebound could favor financials, materials, and IT names
India suffered a setback after COVID-19 infections spiked during the second wave. But as this appears to be easing and state governments have indicated that they’ll take a more measured approach to easing restrictions, suggesting that a more gradual economic recovery lies ahead. We expect to see a downward revision in full-year 2022 earnings estimates before improvements occur in 2023. Given rising material and commodity prices across the globe, we think that Indian-branded consumer goods companies could face margin pressure.
That said, we see favorable risk/reward characteristics in the following sectors:
- Financials: Most large banks are well capitalized and we expect credit costs to be manageable. Furthermore, these banks are more likely to benefit from formalization and the cyclical recovery following the second COVID-19 wave.
- Materials: We’re optimistic about the domestic building materials sector as we believe firms within this space could pass on cost increases at a faster rate than pure consumer companies.
- IT services: With U.S. corporate earnings showing strength, IT remains cyclically well positioned. We’re more positive on larger-cap names as they’re better positioned to manage salary inflation and attrition during the upturn. IT also provides protection against policy tail risk should the rupee depreciate due to changes in global monetary policy.
- Structural growth opportunities over the longer term: We’re constructive on macro themes such as import substitution plays that could benefit from the “made in India” policy and the China+1 supply chain diversification trend. In our view, opportunities could be found across the materials and healthcare sectors.
ASEAN: opportunities amid a challenging economic landscape
The recovery in most Southeast Asian countries now looks more subdued following the resurgence of COVID-19 cases. The spread of the more infectious Delta strain amid a relatively slower vaccination rollout has taken its toll on the region’s economy. We now expect a downward revision to the region’s growth outlook this year. That said, we believe that companies in the following sectors will outperform:
- Healthcare: During the initial stage of the outbreak, hospitals suffered from low patient flows and the cancellation of elective surgeries. Over time, these hospitals have subsequently benefited from assisting the government to perform COVID-19 tests and treating patients. Income derived from these services has helped sustain earnings growth. Post COVID-19, these facilities should benefit from the normalization of operations and a resumption in healthcare tourism.
- Exporters: Manufacturers in Southeast Asia should continue to do well due to solid demand from reopening in the United States and Europe. Some companies have benefited from the shift in orders from China to Southeast Asia. While restricted operations and component shortages may cause some disruption, we believe the impact will be short-lived. The region’s exporters also typically benefit from a stronger U.S. dollar in the event of tapering-related anxiety.
- Digitization of the ASEAN economies: As highlighted in our 2021 outlook, Southeast Asian countries, particularly Indonesia, are experiencing robust growth in their digital economies. Data centers in Indonesia are rapidly expanding as digitization gathers pace across the financials, e-commerce, and ride-hailing sectors. Demand for logistics and warehousing services has grown strongly in the region, and we see high levels of investment in these areas. We anticipate that the listing of key sector leaders in the second half of 2021, particularly in Malaysia and Indonesia, will set the benchmark for the future listing of more new economy businesses in Southeast Asia.
The divergence of Asian equities’ performance so far in 2021 is poised to continue. North Asian economies and Singapore with higher vaccination rates and better containment measures should have a longer runway for growth. In contrast, the recovery for many ASEAN markets has been delayed and may not occur until the end of 2021 or early 2022. This divergence offers a unique opportunity for active managers to choose quality companies throughout the region.
1 The MSCI AC Asia-Pacific Index fell 2.58% through September 24, 2021, but there was significant divergence between the best-performing market (India) and worst-performing market (China). 2 “Transcript of Chair Powell's Press Conference,” federalreserve.gov, June 16, 2021. 3 In this instance, we’re referring to the People’s Bank of China, the European Central Bank, Bank of England, and the Reserve Bank of Australia. 4 Multinational companies based in China to look for another supply chain center in Asia to diversify their supply chains.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
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