Equities

Asia Ex-Japan

Fundamentals

Opportunities favour the brave

2 June 2021

Asia was lauded for having a handle over the Covid-19 situation but in recent months, has seen a sharp deterioration as the number of new infections spiked.

The number of cases in Asia went up 165% from 12.4 million cases at the end of 2020 to about 35.4 million as of 31 May 2021.

The situation has worsened since April, with several countries experiencing significantly higher infections in April and May including India, Japan, Malaysia, Philippines, South Korea, Taiwan and Thailand. As Asia accounts for more than half of the world’s total population, it is increasingly an area of concern as there are renewed fears of more lockdowns in the region.

While the number of cases as a percentage of population is around 0.55% for Asia now versus 2.2% globally, this ratio is a deterioration from only 0.24% at end December 2020. If developed markets are any indication, this ratio could hit as high as 6-10% (UK at 6.8%, France at 8.8% and USA at 10.2%).

With the sudden increase in the number of Covid-19 cases, it came as no surprise that travel restrictions remain in place in most countries. While the situation is still evolving, most countries are likely to adopt prudent measures and continue to impose movement restrictions and delay the opening of their markets. This could result in stagnation as economies take longer to recover.

The rise in the number of new infection cases in Singapore recently led to new measures being introduced in May 2021. These measures, under Phase 2 Heightened Alert (P2HA), aim to prevent further spread of the virus. The local situation is still under control, and the impact is minimal for now. In addition, the market takes comfort that these measures are regularly being reviewed and implemented, as seen since the outbreak of the pandemic in early 2020.

STI a leading outperformer

Since the start of the year, the Straits Times Index (STI) has been one of the leading outperformers.

At the high of April 2021, the STI was up 13.2% for the year (YTD) – surpassing most of the regional markets and ranked second best performing market. As a comparison, regional markets’ performances ranged from -1.7% (for the Shanghai Shenzhen CSI 300 Index or CSI300) to 19.2% (Taiwan Stock Exchange Weighted Index or TWSE).

While most of the regional markets have given up substantial gains in the last few weeks, the STI is still up about 11.3% YTD versus -2.7% (for the Bursa Malaysia KLCI Index) and +15.9% (TWSE).

Flight to defensives, value and cyclical stocks

Regional markets, especially markets with higher percentage of growth companies, particularly in the diverse technology sector, saw wide fluctuations in the past two months. For example, the TWSE gave up 3.5% from recent 52-week high to current level. This was also seen for CSI300, which gave up 10.1%. In comparison, the STI only shed 2.3%. Over in the US, the NYSE FANG+ Index also plunged 10.1% from 52-week high in Feb 2021 to its current level.

This was largely due to the switch out of selective high-growth companies. Funds went into value and cyclical stocks, positioning for companies that will potentially benefit from the re-opening of economies.

To re-cap, the STI fell 11.8% in 2020. Singapore, which is a small market highly dependent on external factors and trading partners, was vulnerable to the global pandemic. Several sectors suffered, and this included energy-related, banks, REITs, property, hotel and industrial stocks.

However, the sell-down also threw up opportunities for companies which were either oversold or were trading below regional peers. The global re-opening trend also supported interest for value and cyclical stocks which are likely to be beneficiaries of economic recovery.

Global trend favouring value stocks

The recovery theme is being played out in many markets. The MSCI World Index is up 10.6% YTD. In comparison, last year’s high-flying growth sectors have underperformed this year. The MSCI World Growth Index is up only 6.0% YTD (versus the stellar 32.7% gain 2020), while the MSCI World Value Index has outperformed with gains of 15.2% YTD (versus -3.6% in 2020).

The strong rotation into value stocks is largely supported by expectation of flow-through improvement from a global economic recovery in 2021.

The long-term trend remains positive. Innovation will be a key driver to ensure that companies are able to differentiate, grow and offer products and services that will meet changing needs. The world is now experiencing the start of the innovation super-cycle. This encompasses AI, big data, cloud, 5G, IoT, communications, etc.

These key trends should continue to dominate in the coming decade.

Building a smart nation

In Singapore, the government has also outlined its bold and ambitious plans to transform the country into a leading smart nation – and digitalisation will be a key driver. This nationwide agenda will also provide the necessary framework for other previously unavailable technologies, applications, products and services to become widely used in Singapore.

Covid-19 has accelerated the adoption and use of e-commerce and companies have adapted and digitalised their businesses. We believe this pace will continue and will become even more critical, especially with the roll-out of 5G infrastructure.

Digitalisation is also seen among financial institutions, telecommunications, property, REITs and Healthcare companies. Driven by these strategic plans to transform and digitalise the Singapore economy and companies, we believe the long-term growth story for Singapore is intact.

Buy, Sell or Hold

The current correction for high-growth stocks could throw up opportunities to buy into previously expensive valuation high-growth stocks for medium to long term investment time frame. Innovation-focused companies are likely to generate value and perform well. In the meantime, the current focus on value ideas is likely to continue as companies ride the economic recovery in the coming quarters.

In Singapore, the government aims to get all residents vaccinated and is proactively reacting to the crisis. While the end is nowhere in sight, active preventive measures are in place and will ensure that Singapore will emerge from this pandemic ready for the next phase of technology and innovation driven growth.

The regulatory framework is in place for long-term sustainable growth. Singapore has also in recent months attracted capital and investments from global big-tech companies seeking to set up regional hubs and presence here.

The STI is currently trading at price-earnings ratio (P/E) of 12.9x FY21 earnings and 11.7x FY22 earnings. In terms of price-book, it is at 1.06x FY21 book – which is below the 10-year historical average. Valuations are not expensive. There is value for long term investors in choosing a stock pick strategy and advocating a balanced portfolio of banking, property, REIT, technology and industrial stocks.

It is important to remember that there are pockets of opportunities for those who are patient enough to sieve out the noise and identify long term growth trends.

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