Despite lower-than-hoped-for global growth, T. Rowe Price remains positive about a region whose domestic demand is holding up relatively well, writes Anh Lu, portfolio manager of its Asia ex-Japan equity strategy.
Governments in their response to the coronavirus pandemic have had to achieve a balance between adding the right level of stimulus – not too much or withdrawing too early. Although all countries saw deterioration in fiscal balances as they had to add some stimulus during 2020, the level of deterioration in Asia in general is more measured compared to some parts of the world. In addition, due to falling imports and lower commodity prices, most Asia ex-Japan governments have been able to keep their current account balances healthy. This bodes well for Asian foreign exchange from here, while periods of US dollar weakness historically have been good for regional equity returns.
We are seeing signs of China starting to withdraw some liquidity, but we feel Beijing can continue to calibrate policy stimulus as needed in 2021. Chinese policymakers are not out of ammunition and there is room for them to do more should this become necessary. We maintain a cautious outlook on the frayed relations between the US and China. This is expected to remain as one of the key risks to Asian ex-Japan markets in 2021. China/US relations will likely continue to remain tense even with a Biden government. Perhaps the areas of contention may shift, but we think US national security concerns over technology are unlikely to go away.
We think the growth of intra-regional trade will continue to rise over time. The Regional Comprehensive Economic Partnership (RECEP) trade agreement between ASEAN and five other Asia-Pacific countries will likely further boost this in the medium to long term. While too early to quantify the potential impact of this deal on our investments, the direction is positive as the rise of intra-regional trade will tend to increase efficiency and enhance economic growth.
China to lead Asia’s recovery
China’s economy has largely returned to normal, the only major economy to have done so. Domestic consumption and services are likely to drive growth next year and the recent rebound in retail sales is encouraging.
Positive growth spillovers in 2021 are likely to be increasingly felt by China’s Asian neighbours. Growth prospects among the emerging market economies still appear to be narrowly based, focused on China and northeast Asia.
The monetary and fiscal measures deployed by various governments in Asia to stem the impact of the outbreak should continue to be supportive in 2021. Even in the countries that have been worst affected, such as India, while the number of cases is not obviously declining, the mortality rate for Covid-19 has been low, partially due to the relatively young populations, and this has allowed the government to ease the lockdowns, resulting in a gradual normalisation that is evident in the PMI rebound.
Sticking with bottom-up investment
We believe that Asia ex-Japan equity markets continue to offer opportunities to investors looking for reasonably valued, high-quality growth companies that can successfully navigate this temporary period of uncertainty due to the coronavirus to eventually emerge stronger than before.
We expect that the coronavirus outbreak may hasten consolidation in several industries in Asia, and we are focusing on companies that potentially stand to benefit from this acceleration. Domestic consumption remains an overarching theme in our portfolio. We believe that Asian households are generally under-levered and consumption is a secular opportunity.
We also favour beneficiaries of import substitution, particularly China, as domestic companies come up with ways to replace imports with local products, especially amid heightened geopolitical tensions. We find that the trade issue is prompting Chinese companies to source more products locally. Given the vulnerability of some parts of the global supply chain to external disruption revealed by the coronavirus, this trend is likely to continue.
We believe some of these domestic-focused Chinese companies could emerge as global players over time. In China, we look for companies that will benefit from the increasing demand for premium products while across countries there may be opportunities in businesses that will benefit from consolidation in fragmented industries. When we think about our bottom-up stock picks, we also look at the extent of a company’s innovation, not merely in the use of technology, but also in other ways as it seeks to improve market positioning.
Investment opportunities in 2021
Stock markets generally have done well this year, but Asia ex-Japan is still relatively better value versus other markets, in our view.
While there are pockets of very expensive stocks in Asia, there are also many high-quality growth businesses still trading at reasonable multiples relative to their own history and relative to a lower cost of capital. This is the area where we are naturally owning the most stocks.
We also find good value in some of the cyclical stocks that were hit hard by Covid-19, but which we think will emerge just as strong or even stronger after the pandemic. These tend to be companies that have suffered a short but sharp cyclical downturn because of the pandemic.
The Asia ex-Japan region continues to be dynamic, constantly offering us new investment opportunities. Companies that should come out of the crisis stronger tend to be those that are leaders in their sectors and are able to gain market share and consolidate their industries. We favour companies that benefit from a strong capital structure and are likely to weather a potentially prolonged downturn in business activity.
While we recognise that the current environment presents a challenge to earnings forecasts, we expect to see healthier earnings growth re-established in 2021 and beyond. It will remain key for governments to strike the right balance between adding stimulus without over-stimulating or withdrawing too early.
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