We are constructive on Asian regional and Chinese equity markets for 2021 and beyond. The region is rebounding strongly from 2020’s pandemic-induced crisis. Here are the main points to note:
- Asian equities had a stellar 2020, with the MSCI All Country Asia ex-Japan index outperforming both the MSCI US and MSCI Emerging Markets indices. China, Taiwan and South Korea did particularly well, supported by better control of the pandemic, while ASEAN and India faced longer lockdown conditions and slower tourism. The gradual recovery should continue to be led by North Asia, while the rest of Asia catches up.
- China in particular was one of the world’s most resilient economies in 2020. Decisive lockdown and policy measures enabled a quick, broad-based recovery, which translated into stronger earnings growth and one of the best equity returns in 2020.
- Asia remains the engine of global growth, helped by the emergence of significant intra-Asia trade that is helping the region to resist the downdraft of recovering, but slower paced, global activity.
- The unprecedented fiscal and monetary stimulus to combat the economic downturn has been very supportive. We expect policymakers to gradually normalise fiscal and monetary policy while continuing structural reforms and opening financial markets further. Last but certainly not least, environmental sustainability is now a priority.
- Key risks we monitor include:
(i) COVID-19 developments
(ii) Concerns over increasing debt levels.
(iii) Sino-US tensions - Although technology is expected to remain a sticking point in the Sino-US relationship, we foresee less uncertainty and risk in broader US-China relations. We expect the new US administration to adopt a more rules-based and predictable approach that should benefit both Asian and Chinese equities.
- We are positive on Asia and China equities and favour an active investment approach given the solid earnings growth in a generally growth-scarce environment. In addition, the region is still under-owned in many portfolios, although it has benefited from favourable technical support via robust investor inflows. These markets remain inefficient, with rich alpha potential in an increasingly volatile environment.
Asian equities: Structural changes underway
Asia has been changing structurally towards more service-oriented economies. COVID-19 has further accelerated this transformation. 2020 saw an additional 40 million internet users in ASEAN – bringing the total to about 400 million (60% of the population). The new users have boosted gross merchandise value growth in home deliveries, e-commerce, video-conferencing, streaming and the financial services sectors.
Asia is witnessing a gradual relocation of global supply chains. Domestic demand-orientated fiscal stimulus under the Biden administration should continue to pull in exports from many emerging markets, particularly Asia. The US trade sanctions on some Chinese tech companies have led a number of US firms to look for suppliers outside of China. This has benefited Taiwan, South Korea, Vietnam and other ASEAN countries.
Amid the competition with the US, China is deepening its ties with Asia and Europe. The recent signing of the Regional Comprehensive Economic Partnership is a good illustration. In November 2020, 15 Asian countries including China, Australia, Japan, South Korea and ASEAN signed the RCEP, which aims to provide a common platform for regional cooperation, offering a backstop for regional growth. China’s 'dual-circulation' policy - using its internal growth impetus to drive domestic and regional growth - should support a bullish view on emerging Asian markets amid COVID-19.
Market technicals are favourable in Asia as flows, positioning and sentiment are supportive. Despite the sharp recovery in Asian stock indices, institutional investors are underweight Asian equities given their general risk aversion and the uncertainty over Chinese tech due to US export controls on semiconductors.
Asian equity flows could improve in 2021 as vaccine rollouts revive risk appetite and a potentially less volatile Sino-US relationship creates better visibility on regional tech earnings.
Chinese equities: Taking the driver's seat
China remains a bright spot in 2021 after the Chinese economy was the only major economy with positive growth in 2020. This should continue, led by the three pillars: Technology, sustainability and the 'dual circulation' policy.
China was first in and first out of the clutches of the virus. Its recovery has been impressive, broadening from construction through to consumption and services. Chinese exports showed remarkable resilience during the pandemic as demand for COVID-19 related products appears to be longer lasting, while a broader-based recovery in other categories is emerging.
While near-term volatility could weigh on Chinese asset prices, it is unlikely to change the benign outlook given the rapid recovery and room for further stimulus. This macro-policy backdrop is supportive of Chinese asset prices in the medium term.
The 'dual circulation' strategy
China introduced the 'dual circulation' concept in its 14th Five-Year Plan, a policy shift towards a focus on boosting domestic growth and high-tech infrastructure investment while still engaging, but not relying on, the external sector to sustain stable growth amid the long-term strategic competition with the US.
The emphasis on the green economy, climate control and revitalising manufacturing augurs well for sectors targeted by new infrastructure spending, technological innovation & upgrading, AI, 5G networks, big data centres, healthcare, as well as environmental protection, water conservation projects and renewable energy.
This suggests that domestic demand growth, import substitution and technological self-sufficiency look set to be key macroeconomic factors for investment opportunities in China in coming years.
In particular, domestic brands in technological and financial innovation, industrial consolidation and consumer upgrading will likely drive Chinese asset prices in the long term.
More structural reforms
The lifting of restrictions in domestic financial markets, accelerating reforms and the inclusion of China A-shares in major global indices are facilitating access to China's onshore financial assets.
2020 marked the People's Bank of China’s least interventionist currency policy stance in years and we expect the large rally in the renminbi of 2020 to extend further in 2021 on the back of China’s balance of payments remaining strong and a reduction in uncertainties over tariffs under the Biden administration.
Structural reforms should continue, such as the three-year action plan for state-owned enterprise reform through privatisation, consolidation and better corporate governance.
We advocate active management
Asian equities: The combination of Asia's growth outlook and investors' under-exposure to the region should result in many attractive opportunities for investors. Household wealth is rising and Asia is undergoing a structural digital transformation. It is home to the next generation of companies that are meeting Asians’ needs. Investors adding to their currently underweight position in Asian equities can expect appealing rewards.
China equities: A long overdue catch-up of China’s share in global financial flows is underway. With China’s long-term policy and growth aspirations to make the country a global economic power and the renminbi a global currency, Chinese assets are set eventually to become an asset class of its own. China equities, and in particular, A-shares, can be good sources for alpha given the inherent inefficiency of the asset class.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.
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