Asian stocks: Picking the recovery

First to get sick, first to recover. That is the prognosis for Asia’s stockmarkets as the region moves to reactivate its economies following the COVID-19 shutdowns.

Already, signs of resurgence have emerged in China, with the latest data showing a jump in exports and factory output from Asia’s largest economy.

China’s industrial production growth turned positive in April, rising by 3.9 per cent year-on-year, supported by a rebound in the auto and electronics sectors. This followed better than expected exports data, with a 3.5 per cent rise for April driven by increased electronics exports.

Property investment and construction activity also appear to have turned a corner, according to ANZ Research.

“If the recovery momentum continues, China could avoid another GDP contraction [year-on-year] in [the second quarter],” senior China economist Betty Wang said in a 15 May report.

Asian stockmarkets have also posted gains over the past month, particularly in those nations showing progress in combatting the coronavirus such as Taiwan, South Korea and China.

“Although the pandemic began in China, and markets there and in the rest of EM [emerging market] Asia bore the brunt of the initial sell-off in January, since then they have generally held up better than other emerging markets,” Capital Economics noted in a 13 May report.

“That is in large part due to the sharp fall in commodity prices … and the fact that external balance sheets in Asia are generally robust, while some countries elsewhere face difficulties due to their stretched finances and reliance on foreign investors”.

The currencies of most EM Asian countries have also held up reasonably well, including China’s renminbi, which has only marginally declined this year, the London-based consultancy said.

However, EM sovereign and corporate bond yields remain higher than before the outbreak of the pandemic, with spreads likely to remain above their pre-crisis level for some time due to higher debt burdens, it added.

Overall though, Capital Economics expects emerging Asia’s regional GDP to contract by 4 per cent in 2020, “the biggest fall in output since reliable records began”.

In contrast, Nikko Asset Management sees China’s containment measures as “clearly beneficial for the region,” although its export outlook depends on US consumer spending and the extent of “de-globalisation” efforts post-pandemic, it said in an 11 May report.

While South Korea and Taiwan have managed to largely contain the virus, India and Indonesia are seen as vulnerable since “both countries suffer from weak healthcare systems, large populations of vulnerable, low income workers and less capacity to maintain a shutdown at least partly due to weaker fiscal resources”.

The currencies of most EM Asian countries have also held up reasonably well, including China’s renminbi, which has only marginally declined this year, says Capital Economics

Weaker earnings

Robert Mann, Nikko AM’s head of Asian equity, warns investors to expect weaker earnings for the year ahead for listed companies.

“Current earnings will be horrible—about half of the China A-shares’ profits in the first half will be at least down by 30 per cent on last year. The positives are some parts of finance and agriculture, with the negatives being energy, restaurants, transport and media,” he said.

“Overall, it looks like profits will be down by about 40 per cent in the first quarter compared to last year. The market is expecting profits to be down about 20 per cent overall for 2020, so you’ve got to have a decent bounce back from here”.

Mann said he expected less stimulus efforts in China than during the global financial crisis, with the emphasis this time on technology, including “5G and the industrial Internet of Things”.

However, from an investing viewpoint, the Singapore-based Mann suggests focusing on those countries that are better managing the coronavirus.

“We want to invest in countries where the government is strong enough to identify what needs to be done, has the ability to put in place the right policies, and has the balance sheet and power to put those policies in place,” he said.

“So in Asia ex-Japan those economies are China, [South] Korea, Taiwan, Hong Kong, Singapore, whereas ASEAN nations and India are weaker on some of those metrics”.

Concerning sectors, Nikko AM’s “biggest overweight” is in healthcare, then information technology and also communication services, while it is “underweight” consumer staples, industrials and materials.

As at 30 April, the Nikko AM New Asia Fund’s five largest holdings comprised Chinese internet company Tencent, South Korea’s Samsung Electronics, Chinese e-commerce firm Alibaba, Hong Kong-based life insurer AIA Group and China’s Ping An Insurance.

Asia-focused exchange-traded funds listed on the ASX include the iShares Asia 50 ETF (ASX:IAA), rated “bronze” by Morningstar in August 2019 for giving investors “efficient exposure to the 50 largest companies in Asia’s four largest developed markets” (excluding Japan).

Another bronze-star rated ETF is the Platinum Asia ETF (ASX:PAXX), described in March 2019 by Morningstar as “an exchange-quoted managed fund that provides listed access to a strategy we hold in high regard”.

Others include the BetaShares Asia Technology Tigers ETF (ASX:ASIA), the UBS IQ MSCI Asia APEX 50 Ethical ETF (ASX:UBP) and the Vanguard FTSE Asia ex-Japan Shares ETF (ASX:VAE).

Will Asia bounce back quickly from COVID-19?

Capital Economics expects China, India, Japan and Indonesia to be the fastest major economies to recover, largely closing the gap with their pre-virus levels by the end of 2022. (Australia, in contrast, could still face a 5 percentage point GDP gap).

Yet with warnings of a “second wave” of infections such as those seen in South Korea causing further shutdowns, investors can expect more market turbulence before the clouds finally lift.