- Less of a “winner takes all” market; a broader range of sectors and companies to lead.
- E-commerce and tech sectors’ rise to continue.
- China remains the most interesting market in the region.
Recently in Asia, as elsewhere, we’ve seen a turnaround within markets following the positive vaccine news. Those perceived as “lockdown losers”, such as travel, leisure, financials and energy shares, have rebounded the most sharply. Meanwhile, the earlier “lockdown winners” have lost momentum and lagged the market rally.
This market rotation has been a global phenomenon. But will it last? I wouldn’t be so sure.
Return of the lockdown losers?
On the one hand, of course, positive vaccine news should significantly reduce the potential risks over the next one or two years. And if widespread inoculation happens rapidly over the next six to nine months, then economic activity may quickly return to normal by late 2021. This would be very positive for economic growth as pent-up demand is released for travel and other depressed areas of consumption and investment.
Over time, more rapid growth could potentially cause inflation and interest rates to rise. This would support all the more ‘cyclical’ elements of the markets, including financials, which have been big losers from the collapse in interest rates in the last 12 months.
This paints a positive picture for the lockdown losers and cyclical areas to continue their recent vaccine-led run of outperformance.
However, the reality is that many countries still face a very difficult winter, with high levels of Covid-19 infection and continued lockdowns which will depress demand. Large scale government support programmes that have propped-up consumption in many countries in 2020 will also roll-off in 2021.
The real improvements in mobility in economies may not be seen for nine to 12 months yet. And that assumes there are no hiccups along the way in getting new vaccines rapidly rolled out.
Looking further out, it also seems likely that inflation will remain subdued given elevated levels of unemployment. Central banks will likely be slow to raise interest rates.
So, after the initial snap-back in activity, the longer-term upswing may well prove lacklustre in comparison. Factors that have depressed activity and inflation in the last decade could well reassert themselves. That is, heavy indebtedness, adverse demographics, technological disruption and income inequality to name but a few.
Given this uncertainty, we are cautious about moving too far away from the more long-term structural growth stories (including the lockdown winners) in favour of the near-term cyclical recovery trade (the lockdown losers).
Sectors to watch
It does seem likely that in the coming months Asian stock markets will see less of the polarised, ‘winner takes all’ performance, that we saw earlier in 2020. A broader range of stocks and sectors will likely enjoy gains as investors chase those firms with more recovery potential.
One lockdown trend we expect to continue in Asia is the rise of e-commerce. Its penetration is unlikely to recede, as consumers are hooked on the added convenience of these services; the quality and scope of which continue to improve.
Technology sectors more generally have also been winners this year from shifting consumer behaviour, and we are optimistic about the longer-term outlook for many of the main Asian players.
The shift towards 5G telecoms will also continue in 2021. Chip makers are likely to benefit from rising prices for memory, after a downturn in 2019 and 2020. Meanwhile, the ‘digitisation’ of many areas of the economy will continue, which drives demand for increased processor power, bandwidth and storage.
Investors are optimistic
After the recent market strength, aggregate valuations for the region have risen to above-average levels. Consequently, valuations are clearly already pricing in a large part of the recovery in earnings expected in 2021. However, this is a global phenomenon rather than anything Asia specific. Such optimism is not unreasonable given the scope for a sharp snap-back in activity in the next few quarters, and the ultra-low level of interest rates and bond yields around the world.
Underneath the surface, valuations are actually very widely spread. This means that valuations in some of the sectors with strong momentum this year – notably selected healthcare, e-commerce, online gaming, 5G equipment, electric vehicle-related and other popular China A-listed shares – are much more stretched. Meanwhile, many other areas remain more reasonably valued.
The strong flows and performance of new initial public offerings (IPOs, which is when companies “go public” by listing on the stock exchange) in Hong Kong and South Korea give us some cause for caution. So too does the high level of retail investor participation in these deals, and in market trading more generally.
Although not yet at very worrying levels, this sort of widespread investor optimism leaves markets more vulnerable to disappointment.
China still stands out
Looking geographically, it was the smaller markets of south-east Asia that were hardest hit by the pandemic in 2020. This was because of their weaker healthcare infrastructure, greater reliance on tourist activity and limited listed exposure to winners in the online and technology sectors. However, they have bounced back strongly amid the vaccine optimism as their bank and energy companies have come back onto investors’ radar.
We still think there is scope for further catch-up from south-east Asian markets in the near term; however, the choice of investment opportunities at the stock level remains limited. These markets are dominated by the ‘older economy’ sectors, which have less interesting longer-term growth profiles and this makes it unlikely we will become significantly more positive on them in the period to come.
China, by contrast, may have lagged in the latest bounce, but it remains by far the broadest and deepest equity market in the region. It offers a much more interesting range of stock opportunities, both in the mainland A-share market and in the Hong Kong SAR and US listed companies. Here, investors can get exposure to the full range of sectors and a steady flow of new IPOs that constantly refreshes the options available.
Find out more here: Outlook 2021: China.
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