OCBC OneWealth App– Covid-19 surge puts Asian markets in the spotlight

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Vasu Menon

Executive Director, Investment Strategy, Wealth Management Singapore, OCBC Bank

Covid-19 surge puts Asian markets in the spotlight

19 May 2021

The recent resurgence of the Covid-19 virus across Asia has led to questions about whether the region’s stock markets are still an attractive proposition.

A record surge in Covid-19 cases in India and the risk of it spreading beyond the country’s borders to the rest of Asia, has spooked regional bourses and kept investors on tenterhooks.

Singapore and Taiwan were the latest in Asia to impose tighter restriction in response to a fresh wave of Covid-19 infections.

Taiwan raised its alert level last Saturday, imposing two weeks of restrictions that will shut many venues and limit gatherings.

Last Friday, the Singapore Government also imposed tighter restrictions to stem the spike in infections.

In early May, the whole of Malaysia was placed once again under a movement control order (MCO), amid a third wave of Covid-19 cases.

Elsewhere, Thailand, which was hit by a second wave between mid-December last year until early February this year, is now going through a third wave which started in late March.

Covid-19 is also posing challenges for the Philippines, Indonesia, Vietnam, Laos and Cambodia.

Asian markets have underperformed so far this year

The renewed outbreak of Covid-19 infections in Asia has weighed on the region’s bourses.

The MSCI Asia ex-Japan index has posted a flat year-to-date (YTD) performance for the period up to 14 May (see table below).

In contrast, the MSCI World Index, representing global equities, is up by 9%.

From its peak around mid-February, the MSCI Asia ex-Japan index is down almost 12%, which is the sharpest correction among the major regions.

However, it is not just Covid-19 that has caused Asian bourses to experience a pullback.

Concerns about inflation and rising US bond yields have also weighed on the Asian markets as investors are worried that the US Federal Reserve will tighten policy sooner-than-expected, even though the central bank has said that it has no such plans.

Is Asia a risky investment proposition?

We have not changed our views on Asia ex-Japan and remain sanguine on the region’s equity markets for the medium term.

Investors have come to recognise that risks and uncertainties will remain a fixture in the investment landscape for many years to come.

No doubt, there are risks and uncertainties in the horizon, but overall, we think that the global investment outlook is positive for the next few years.

So, there are good reasons for investors to continue investing in risky assets like equities; and within the equities space, we are still positive on the Asia ex-Japan region.

Asia ex-Japan is in a much better shape today

Over the past two decades, Asia has tightened its belt and made significant changes.

We have seen big improvements in areas like economic policy and corporate governance.

Today the good news is that - Asian companies are a lot more transparent and place a lot more emphasis on shareholders’ interest.

So, for example, many Asian companies today pay out much better dividends than they did 20 years ago – and this has gone down well with global investors – which clearly augurs well for Asian stock markets in the medium term.

In fact, dividends tend to account for a large proportion of total returns when investing in Asia ex-Japan equity markets.

Over a 10-year time horizon, on a cumulative basis, dividends account for close to 50% of total returns of the MSCI Asia ex-Japan index. Hence, a dividend-focused equity strategy might be one way of engaging opportunities in this region.

Why we are still positive on Asia ex-Japan equities?

We are positive on the outlook for Asia ex-Japan equities for several reasons.

Firstly, the ongoing global economic recovery - helped by the vaccine rollout and policy stimulus, will benefit many Asian economies which are export-driven.

Asia ex-Japan is a beneficiary of improving cyclical fortunes. Good improvements in the manufacturing Purchasing Managers’ Indices, offer reassuring signs that the outlook for the manufacturing sector – a major contributor to Asia’s GDP – continues to be on the mend.

The steady global economic recovery has already translated into better export prints for major economies in the Asia ex-Japan region. Asia’s reputation as the world’s export centre invariably means that its fortunes are closely tied to the state of the global economy.

Widespread vaccination and containment of the virus potentially later this year may help unleash pent-up demand in developed economies to the benefit of Asia.

In fact, the Asia ex-Japan region looks poised to record one the strongest economic growth rates in the world this year. According to consensus estimates from Bloomberg, economists are projecting a 5.7% growth rate for the Asia ex-Japan region after a modest 1.4% expansion last year.

The region’s earnings growth is also expected to see a strong V-shaped recovery in 2021. Once again, according to consensus estimates from Bloomberg, analysts are projecting a 44% earnings growth rate for the Asia ex-Japan region this year.

Secondly, Asia has ample policy space to respond to potential economic shocks, be it through monetary or fiscal policies, versus its Western peers.

As it stands, most Asian economies have been more prudent in exercising their fiscal powers, whereas their developed market peers have been quick to pass expansionary fiscal policies with hefty price tags.

In terms of monetary policy, interest rates in the developed world including the US, Eurozone, the UK and Japan are already close to, or below zero.

By contrast, Asian central banks still have some monetary policy space to manoeuvre should their economies require more stimulus support.

Finally, as economic recovery gains traction - we expect value or cyclical stocks to outperform growth stocks.

Asia has a large representation of value stocks on its stock markets and it is therefore poised to benefit from this.

Valuations in Asia now look more attractive after pullback

After the 12% correction from its recent peak, Asia ex-Japan equities are now trading at a 12-month forward price-to-earnings ratio that stands at a reasonable one standard deviation above the 5-year historical average. So, the recent pullback in Asian markets have made them more attractive.

This is not to suggest that Asian markets will not correct further. They may, if the Covid-situation worsens and market volatility rises sharply.

However, in the past 14 months, Asian government have acquired a great deal of knowledge and experience dealing with Covid-19, and their response to the virus this time around has been relatively faster, and containment may prove to be more effective than a year ago. Hence any fallout for Asian economies may not be as severe as last year.

Bottomline

In a nutshell, Asia ex-Japan has good medium- to long-term potential. It is a region that investors clearly cannot ignore. Covid-19 may cause some short-term jitters, but it does not alter the positive medium-term outlook for Asia ex-Japan.

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