18 March 2020

Silver Linings: What We Are Seeing On The Ground In Asia

Silver Linings: What We Are Seeing On The Ground In Asia

The extreme equity market volatility in recent days may be attributed to a host of factors: most notably the coronavirus pandemic, but also falling oil prices and geopolitical tensions, among others. With the exception of the former, these factors have seen ebbs and flows, and are not new to investors. Therefore, the correction in the global equity markets appears somewhat excessive, in our view. While Europe and the US are now experiencing coronavirus-induced shutdowns, there is enough evidence on the ground that supply is gradually coming back online in Asia in general, and in China in particular. The big question now is: will demand chug along given the spread of the virus?

In abnormal times like these, it is normal for corporate earnings visibility to fall dramatically; more so when we are caught unprepared for an exigency like a pandemic. Being fully cognizant that the recovery will be contingent on containment of virus followed by its cure, we would like to highlight some bright spots emerging from Asia. Given the fluidity of the situation, however, we caution that some perspectives here may be overtaken by new developments.

  • Slowly but surely, governments worldwide are learning from China’s response to the outbreak. That is, locking down cities to contain the spread of the virus first and then focusing on economic stimulus – not vice-versa. China’s drastic moves may prove to be the reason why it could recover (although the pace of recovery is arguable). Recovery is also evident in its stock market, which has performed much better than other major markets year to date. If governments follow China’s template, demand should be able to bounce back soon. Uptake in demand will get a further boost from globally coordinated government policy support.
  • As mentioned above, supply disruptions are beginning to ease. Our sense is that around 50%-60% capacity is back on stream, and in some of the companies we hold, capacity utilization has been reported at more than 80%.

    Daily Production Activity Tracker

    Daily Production Activity Tracker

    Source: CICC, as of 16 March 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

  • Unlike with a natural disaster, the “factors of production” – land, labor, and capital – are undamaged. Thus, the resumption of full-fledged supply is just a matter of time. From here on, recovery in demand will be more important. That is why the well-being of the population should be foremost, in our view.
  • Given recent disruptions, whether trade, health, or environmentally induced, manufacturers have taken moves to diversify their supply chains. Dual supply chains would mean demand for more capital stock – machines, robots, factory automation, and the like.
  • All else being equal, we believe many Asian economies will benefit from falling oil prices through manageable current account deficits, lower inflation, and more fiscal space to carry out any stronger stimulus, if needed.
  • Asian companies have deep pockets. On the micro level, most businesses that we track have responded to the tough business environment in the past two years through extensive de-risking, including cost-control measures, better inventory management, and disciplined capital expenditures. It is not surprising to see that a comparison of top 100 companies (ex Financials) in large Asian and Western markets show that more Asian companies have net cash positions, meaning they have the ability to invest back in the business and potentially gain market share once the dust settles.

    More Asian Companies Have Net Cash Positions Versus the West

    Balance sheet snapshot of top 100 companies in each market (ex Financials)

    No. of companies with net cash position No. of companies with net debt position
    Taiwan 57 43
    China/Hong Kong1 48 52
    Japan2 50 50
    Korea 38 62
    US3 18 82
    Germany 33 67
    UK 21 79

    Source: FactSet, Nomura Group Global Equity Research as of December 2019. Screen consists of top 100 companies (ex Financials) with the country of domicile taken per FactSet, where FY18 net debt actuals or estimates information is available. 1China/HK are the top 100 ex-financial MSCI China and Hong Kong indices companies. 2Japan companies are the top 100 ex-financial companies in MSCI Japan Index. 3US companies are the top 100 ex financial companies in the S&P 500 Index. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

  • As a show of strength and confidence in the future, some Asian companies are moving ahead with their business plans. For instance, Jiangsu Yoke Technology (China) said it would acquire LG Chem's color-resist business; Bangkok Dusit Medical Services offered to acquire rival Bumrungrad International Hospital; and Fuyao Glass (China) is entering the trim business by acquiring Triplex Automotive Decoration and Fuzhou Mold in China. In addition, Hindustan Unilever (India) is acquiring GlaxoSmithKline Consumer’s India business; Daio Paper (Japan) plans to acquire sanitary paper manufacturers in Brazil and Turkey; Ain Holdings (Japan) is entering into a business alliance with Shidax (Japan); Ajinomoto (Japan) is raising its stake in Ajinomoto Thailand; and Softbank and Rakuten are gunning to launch their 5G operations in Japan soon.4
  • Asian valuations are looking attractive once again on both an absolute and a relative basis. At the index level, the price earnings (P/E) multiples have fallen below their five-year average, whereas at the select stock level the fall has been much more severe. Long-term investors can start looking to deploy in a staggered manner (i.e., at every dip).

    MSCI AC Asia Ex Japan Index P/E Multiples Have Fallen Below Average

    MSCI AC Asia Ex Japan Index P/E Multiples Have Fallen Below Average

    Source: Bloomberg as of 12 March 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

While daily news reports are full of panic, the solution to the challenge ahead is in plain sight. China’s response to the coronavirus crisis has taught the world key lessons on the way forward: contain first, then stimulate. Already Asian governments like Hong Kong, Singapore, South Korea, the Philippines, and Malaysia have taken various forceful measures of containment, and that bodes well for the market recovery.

4 Any references to specific securities are for illustrative purposes only and are not to be considered recommendations or a representation of all securities purchased, sold, or recommended for our portfolio.


Disclosure

Investing involves risk, including possible loss of principal. The information presented here-in is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the mar-kets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommen-dation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projec-tions, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely re-sponsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.

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