03 August 2020

Asian Equities Update: Why the Shape of Recovery Is Tough to Discern – and Not Our Key Focus

Asian Equities Update: Why the Shape of Recovery Is Tough to Discern – and Not Our Key Focus

The Covid-19 outbreak and subsequent lockdowns brought a sudden, unprecedented shock to the global economy, with resulting volatility gripping financial markets during the first half of the year. Relief came in the form of a synchronized cascade of massive government stimulus packages that pumped liquidity into the global markets.

Regional markets, led by China, rose in recent weeks as better economic data and post-lockdown reopenings improved market sentiment. China expanded 3.2% in the second quarter, although other parts of Asia are still exhibiting contraction. Industrial firms are coming back online with higher capacity than the services side, which is still navigating the impact of cautious consumer spending. As the chart below shows, equity performance has been uneven across Asia.

Recovery Has Been Uneven Across Asian Equity Markets

Recovery Has Been Uneven Across Asian Equity Markets

Source: Macrobond, Bloomberg, PineBridge Investments calculations as of 22 July 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

Despite China’s recovery, forecasting the shape of Asia’s recovery remains difficult given the lack of near-term earnings visibility. Prolonged social-distancing measures may pose risks to companies as balance sheets come under stress, which in turn puts further strain on the financial system. In this environment, we avoid relying too much on earnings to gauge the shape of what’s to come, given that earnings could be visible for the next three months or invisible next week.

This uncertainty about earnings visibility will likely lead to a downgrade in earnings, making stock selection critical. We have stepped up our engagement with company executives to understand the steps they are taking to survive the crisis. We tend not to focus on companies that benefit from this crisis over the short term, but rather on those that will survive over the long term.

Valuations offer long-term opportunities

The selloff early in the pandemic has made valuations very undemanding today. As with the crisis in 2008, we believe this environment will allow companies with strong balance sheets to grow by being cost-efficient and increase their market share. We also expect some mergers and acquisitions as bigger players acquire weaker ones.

Volatility Has Declined as Sentiment Improved

Annualized 30-day Volatility of the MSCI Asia ex Japan Index

Volatility Has Declined as Sentiment Improved - Annualized 30-day Volatility of the MSCI Asia ex Japan Index

Source: Macrobond, PineBridge Investments calculations as of 22 July 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

Volatility spiked amid the historic Covid-19 related selloff, rising to the highest point since the global financial crisis and comparable to the 1997 Asian Financial Crisis. Since then, improving market sentiment, combined with unprecedented fiscal and monetary support across the region, has helped volatility return to levels closer to long-term averages. At the same time, we’ve also observed an increase in retail participation – so-called “hot-money” – in the market, both in mainland China and in various other parts of the region, which can exacerbate headline volatility.

Retail Participation Is Increasing in Asian Equities

Retail Participation Is Increasing in Asian Equities

Source: Datastream, UBS. Asia ex Japan average is based on data from Taiwan, Korea, Thailand, and Malaysia as of 22 July 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

The pandemic has shifted and accelerated the adoption of technology trends in commerce and other sectors that we have positioned for over the past few years. We intend to continue investing in companies well positioned to benefit from these shifts.

In the short term, we are monitoring how markets are recovering from the lockdowns, the normalization of supply chains, and any pickup in demand, including external demand, as exporters have been hurt by the Covid situation and thus valuations are depressed. As we have said before, containment of the virus is key. Demand cannot improve until consumer confidence and spending return and capital expenditures ramp up. Consumer confidence will bounce back only when the public health threat eases. The situation in some parts of Asia has stabilized, while in other locations the number of cases is still trending up six months into the pandemic. Once the virus is contained, we believe the swing in pent-up demand will be very strong.

Over the long run, we are mindful of changes stemming from geopolitical shifts, such as rising protectionism. These may result in greater uncertainty, but also in structural changes in key Asian markets that could open new opportunities for equity investors.


Disclosure

Investing involves risk, including possible loss of principal. The information presented herein 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 markets 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 recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, 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 responsible 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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