Andrew Gillan, Head of Asia ex Japan Equities and portfolio manager for Asian growth equities, provides an update on how the region has fared during the coronavirus crisis and the implications on portfolio positioning.
- China has outperformed other equity markets year-to-date most likely because its virus containment measures appear effective and investors believe that a stimulus-led recovery is possible1.
- An advantage for Asia is that GDP growth and interest rates are generally higher than many western developed nations, allowing governments to cut rates further if needed to stimulate their economies2.
- Andrew believes that private sector businesses operating within the internet and consumer sectors are likely to continue to offer good structural growth opportunities.
As Singapore experiences its own ‘lockdown’, I wanted to put together some thoughts on what has happened so far and how the coronavirus has changed the investment landscape in Asia. One perhaps surprising observation is that year-to-date China has been one of the best performing equity markets, both within the region and globally, as the local A share market (CSI 300 Index) has been relatively resilient, while even the declines in Hong Kong’s Hang Seng Index have been smaller than many other major indices1. My own explanation for this is that first, virus containment measures in China proved fairly effective. While some short-term economic pain was felt across China, particularly with the extended Lunar New Year holidays, the economic impact so far seems to have been somewhat short-lived relative to many other countries. The second reason is that investors appear to have more optimism that China has the means to help stimulate its economic recovery, this is likely reflected in how the Chinese markets have performed against some of the other major Asia ex Japan markets so far this year.3
The more emerging economies with weaker fiscal positions such as India and Indonesia have seen their stock markets much harder hit in the sell-off. It is certainly true that the magnitude of financial support recently announced by the US Federal Reserve will be hard to replicate across Asia. That said, on the positive side for Asia, gross domestic product (GDP) growth rates and interest rates are generally higher than many western developed nations so rates can still be cut further2. This trend will not be supportive for the banking sector, where lower interest rates tend to lead to lower profitability as net interest margins decline. This is especially true of Asian banks in the more developed markets because interest rate cycles are more closely linked with the US, where there is a tendency to lower rates when the Fed does.
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At the time of writing (15 April) we have yet to see a significant shift in the direction of the US dollar, which has remained strong throughout the first phase of this crisis. A weaker dollar would be more supportive for Asian equities and would give those more emerging economies in the region a bit more breathing space to cut interest rates further. Similar to the relative strength of some of the mega cap tech stocks in the US seen during the pandemic, it is also true that select stocks in the Chinese internet sector have proved quite resilient during the first quarter relative to companies with predominantly offline business models.4
In terms of portfolio positioning, we have continued to increase our allocation to China as we think business conditions there appear better in the short term. We added new positions in cement and construction machinery in the first quarter as we expect these areas to benefit from economic stimulus. The bulk of our exposure in China remains in private sector businesses operating within the internet and consumer sectors, which we believe are likely to continue to offer good structural growth opportunities. Given the more challenged interest rate environment, we have reduced our banking exposure across Asia ex Japan and allocated more towards the technology sector, which in our view, has the potential to recover faster.
Past performance is not a guide to future performance.
1 Source: Bloomberg, year-to-date to 15 April 2020, total returns in USD for CSI 300 Index and Hang Seng Index against major stock indices.
2 Source: World Bank Group, The Economist, as at 15 April 2020. (https://databank.worldbank.org/reports.aspx?source=2&series=NY.GDP.MKTP.KD.ZG
3 Source: Factset, year-to-date to 15 April 2020, total returns in USD by country constituents for the MSCI Asia Pacific ex Japan Index.
4 Source: Bloomberg, year-to-date to 15 April 2020, total returns in USD.