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Asian Market Perspectives: Looking Forward, Positive but Selective
Markets globally are trading the end of lockdown and resumption in economic activities at inflection points going into or coming out of recession.
Unlike the Global Financial Crisis in 2008, Central Banks and Governments have quickly responded with measures to mitigate the lockdown impact and stabilize the financial system.
The USA and Europe lead the world in stimulus on the monetary and fiscal front. Their reserve currencies bring these countries much fiscal firepower. While the US stimulus is led by Republicans that control the government and 2020 presidential elections, the European stimulus of €1-1.5tn is a result of Franco-German efforts in keeping the European Union intact.
Even though major emerging markets such as China and India have announced significant stimulus packages, an in-depth analysis reveals that these packages bring limited fiscal support. A large part of the stimulus is monetary support that has been extended to the economy. We expected that large-scale infrastructure programs such as urban infrastructure in China, roads, and rural infrastructure in India will be implemented in the coming months to absorb the excess labor displaced from the service sector and urban areas.
Timing the Market
Stemming from concerns about the COVID-19, we saw post sharp outflows from emerging markets in the last three months. In our view, risk-reward remains very favorable. With backdrops of expanding central bank sheets and strong fiscal support, institutional investor positioning remains very bearish.
Outflows from EMs at 2.5% of market cap in March and April are higher than those seen during the GFC panic. As lockdowns end and economies open, monetary and fiscal support will feed through and revive activities. Without a large scale of second wave infections, the world will get used to living with the virus.
Analysts are much focused on the earning cut. The catalysts for this are a one-off lockdown event and the tendency for markets to the historical bottom.
Capture the Asian Opportunities
Performances vary across regions. North Asia, where was first to come out of lockdown, has strongly outperformed while India & ASEAN have lagged as lockdown ended merely a week prior.
Within most markets, investors are primarily positioned in large-cap, such as tech-dominated stocks, while mid-small caps and cyclical sectors like financials & consumer discretionary are under-owned and should catch up as activities, e.g., ISMs, PMIs pick up.
We believe that the worst global growth is behind us, aided by easy liquidity and low-interest rates, economies should slowly go back to near normal. In line with our GARP based investment approach, we continue to favor businesses with strong moats, cost, and technology leadership while being sold at reasonable prices.
We have increased Korean exposure for the past three months, preferring semiconductor names which could benefit from data centre demand and the smartphone upgrade cycle. EV battery producers continue to be in our core holdings as EV adoption goes mainstream globally on the back of strong policy support from governments to mitigate climate change.
In recent months, we have added high-quality financials, as valuations at 0.3x price/ book are factoring in extreme pessimism, despite robust balance sheets and their leading industry status.
We believe that Korea could benefit from a global economic upturn by being a neutral supplier of its advanced technology equipment and smartphones.
Our significant exposure is in technology platforms/super apps, which continues to gain a higher share of wallet through big data analytics and hyper-personalization of their offerings.
In addition to the Chinese healthcare sector, which remains a core part of our portfolio, we are positive for secular themes such as sportswear and after-school education.
In recent months, we have added selected insurance names as we believe their valuations are highly attractive after 12-15 months of under-performance and anticipate that growth should pick up in the coming quarters.
Despite nearly 45% of the Chinese exposure, we continue to hold an underweight position relative to MSCI Asia Index, which has almost 53% in China and Hong Kong. We believe risk-reward is better in India and ASEAN, where have under-performed in the last 12-18 months and are under-owned. High debt/GDP will constrain China’s ability to give large scale stimulus, while valuations are not factoring in the possibility of growth slowdown and heightened tensions with the US.
We are overweight in India; a stance that has proven to be a significant detractor over the last two and a half years. We believe a large number of dislocations in an account of goods and services tax implementation, and currently, COVID is behind us. As India opens up again, the number of COVID cases continues to be high. Having said so, we draw comfort in the low death rate of 4%, with total deaths of 7,500 (as of April 8). We believe that low-interest rates, coupled with increased FDI interest, could encourage economic recovery as was visible in January/ February prior to the outbreak of COVID.
We continue to like top quality financials with strong franchises as consumption proxies are expected to have demand recovery over the next couple of quarters.
The ASEAN region, such as India, has lagged North Asia’s recovery since late March, as most countries were still in lockdown. Even though we have seen a sharp catch up with the region opening up in the past few weeks, stocks are still trading at 20%-30% below pre-COVID levels. We continue to like consumer proxies such as Universal Robina and Security Bank in the Philippines, a pan Asian hospital chain listed in Malaysia, as well as jewelry retailer, and a consumer-focused bank in Vietnam.
As risk appetite normalizes in the coming months, these names, which are industry-leading franchises in their respective industry, could see a premium from superior growth rates and vast market potential. Consequently, our ASEAN exposure, so far a detractor, should subsequently be a positive contributor to portfolio's performance.
Downside Protection in a Cyclically Positioned Portfolio
In the near-term, markets may continue to be volatile with heightened US-China tensions on trade, geopolitics, and technology. The debate on the adequacy of stimulus to overcome deflation will influence sector performance. However, what typically happens after a pandemic - or a war? Policymakers usually take it as an opportunity to kick start economic growth through state programs and ease pressure on the most vulnerable sections in society.
We believe our multi-pronged approach (highlighted below) with discipline on valuations should help the fund do well as risk appetite normalizes, and stock picking becomes a key differentiation.
Be among the Dominant Leaders - Strong, transparent management with thought leadership
Healthy Balance Sheets - playing operating leverage not financial leverage
Emerging Sector Leaders - Mid/small caps which are leaders in promising categories
June 23, 2020
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