This article first appeared in Personal Wealth, The Edge Malaysia Weekly on August 17, 2020 - August 23, 2020

Equity markets in Asia-Pacific have staged a strong rebound from their lows in March following a gradual reopening of the region’s economies post-lockdowns brought on by the Covid-19 pandemic. The MSCI AC Asia Pacific Index saw a return of 12.15% over the three months ended July 31, compared with -10.1% in the three months ended April 30.

This upward trend is expected to continue for the rest of the year, although stock markets in the region could remain volatile. Affin Hwang Asset Management Bhd (AHAM) deputy managing director and chief investment officer David Ng tells Personal Wealth that investors should apply dollar cost averaging in such market conditions.

Asian equity markets were down 27% at the worst point this year (March 23) in ringgit terms, he notes. “The markets have now reversed their losses and are up 5.6% (as at July 24).

“The annualised return of Asian markets over the last 10 years (June 30, 2010 to June 30, 2020) was 9.3%. Even at the lowest point this year (June 30, 2010 to March 23, 2020), the annualised return was 7%.

“It pays to be patient and invest for the longer term. Furthermore, the region provides an ample choice of companies, sectors and countries with divergent performances from which to pick.”

Ng says equity investors are forward-looking and are pricing in a rebound in economic activity with the gradual easing of lockdowns globally. Sectors such as technology and healthcare and companies that were least hit or even benefited from the lockdowns have outperformed the rest of the market, he notes. However, some of the key risks to watch out for are elevated valuations, geopolitics, risk of a second wave of Covid-19 infections and a failure to develop a vaccine.

Now is a good time to look at Asia-Pacific, says RHB Asset Management Sdn Bhd (RHBAM) managing director, CEO and group asset management head Eliza Ong Yin Suen. “The region will recover much faster than developed markets post-Covid-19. Its 4.3 billion population (Asia-­Pacific is home to 60% of the global population), led by China, will drive the demand for goods and services,” she tells Personal Wealth.

Principal Asset Management Singapore CEO Christopher Leow says global economic activity, as measured by the Purchasing Managers Index (PMI), will likely accelerate over the second and third quarters of this year as countries emerge from lockdowns. He points out that the recent improvement in US employment data suggests a faster economic recovery.

“While the number of daily cases in the US surged again in July, we do not expect the economy to be locked down in the same manner. While this may delay the recovery of some sectors, it is notable that the death rate for the week ended July 28 was -1.5% versus the entire coronavirus episode of 3.4%,” says Leow.

“Policymakers are unlikely to withdraw their stimulus anytime soon as economies and job markets have not healed sufficiently and inflation is not a threat. Hence, fuelled by generous fiscal spending, record low interest rates and aggressive quantitative easing by central banks in the developed world, the initial pace of reflation will likely be strong.

“This provides a positive backdrop for Asian (ex-Japan) equities going forward. Their 2021 valuations at a price-earnings ratio of 14 times are also cheaper than those in developed markets.”

Equities in Asia offer high-growth prospects and relatively cheap valuations, says Leow. The region’s growth over the long term is one of the highest in the world, underpinned by a young populace, large domestic markets, stable political systems, pro-growth policymaking by technocrats and a deep pool of investible names, from local leaders to global players.

“Asia is home to two of the world’s most populous countries: India and China, with about 1.4 billion people each. The scale and growth of their domestic markets are conducive for the future giants,” he adds.

Asian markets have recently recovered a significant portion of their losses from the earlier part of the year. AHAM’s Ng says the losses were due to several factors, the first being an overreaction by investors, who sold down Asian equities 30% from their peak in January.

As the region’s economies gradually emerge from their Covid-19-induced lockdowns, investor expectations have shifted from a very subdued outlook for the medium term to a faster-than-expected recovery, he points out.

The recent recovery in Asian currencies is due to the weaker US dollar. Historically, there has been a high correlation between the performance of Asian markets and their respective currencies, says Ng.

He also says investors were bearishly positioned in equity markets earlier this year, with more than US$1.2 trillion parked in US money market funds from February to May, owing to concerns over the impact of the coronavirus outbreak. “Until June 17, foreign investors had net sold more than US$85 billion of Asian equities and US$12 billion had been redeemed from Asia-Pacific mutual funds and ETFs. We have only recently seen some tentative reversal of these flows. In the first week of June, foreign investors net bought US$3.6 billion of Asian equities after selling continuously since February.”

Principal’s Leow says equity investors in general have looked past a myriad of headwinds, such as the political developments in the US and abroad as well as the economic challenges caused by the pandemic, as sentiment has recovered sharply due to the combined effects of stimulative monetary and fiscal policy. The aggressive balance sheet expansion of major central banks has helped push liquidity into all types of risk assets, including stocks.

“There was also positive economic data reflecting the effects of the huge stimulus and businesses reopening. For example, the US unemployment rate continued to improve in June, recording 11.1% versus 13.3% in May as businesses reopened, while China’s manufacturing and non-manufacturing PMIs are now above 50, confirming a recovery in the domestic economy,” he says.

“The Shanghai Composite Index rose 8% year to date in local currency terms (versus the broader MSCI Asia ex-Japan’s -2%). China was essentially first in and first out of the Covid-19 lockdowns. The economy has started to see a recovery in the manufacturing and services sectors.

“China’s reopening provides a template of what a recovery may look like for other economies that are emerging from their lockdowns. South Korea and Taiwan have shown that they are capable of containing the outbreak. As a result, their stock indices in local currency terms have risen 3% and 4.5% year to date respectively.”

Although market players have projected a V-shaped recovery since the March lows, RHBAM’s Ong says the real economy will take a much longer time to recover as the pandemic has caused not only a health crisis but also an economic and job crisis, as well as potentially a currency and debt crisis for governments around the world. She notes that the firm has seen market performance detach itself from the real economy.

“The recovery in each country will not be the same as it will depend on their current state of budget surplus/deficit, currency strength, state of Covid-19 containment, reliance on domestic consumption versus export-led drivers for the health of their economy, size of domestic population to support the recovery and growth as well as their ability to innovate and remain competitive in the Covid-19 era and post-Covid-19 world,” says Ong.

“The developed markets will see huge contractions this year, with the US expected to contract 8% and the eurozone by 10.2%. Asia-Pacific — while impacted — will experience growth, with China’s economy expected to grow about 2%.”

She adds that with the continuous rounds of interest rate cuts expected by central banks in Asia, fixed income should remain an attractive asset class for investors. RHBAM has also seen government bond-buying activity in countries such as Indonesia.

“The Bank of Indonesia held IDR445.4 trillion of government bonds (3.2% of 2019 GDP) as at April. Meanwhile, Bank Negara Malaysia announced in May that it stood ready to provide liquidity to the interbank market to ensure orderly market conditions. We expect to see buoyant activities in the Asia-Pacific local currency fixed-income markets,” says Ong.

Ng says economic data will be poor and he expects to see year-on-year declines for the next several months. Unemployment has risen and measures restricting economic activity, such as travel (both business and leisure), mass gatherings and sporting events, are still in place.

But sequentially on a month-on-month basis, the data could improve as lockdown measures are gradually eased. “We believe this will be conducive for financial markets,” he says.

“In the near term, the countries that will outperform will be those that are the earliest to recover from the impact of Covid-19. These include China, South Korea and Taiwan as they remain diligent in preventing the spread of the disease. A low number of cases coupled with advancements in treatment methodologies have kept the number of deaths low.

“In the medium term, there will be opportunities in countries that are currently underperforming such as India and Indonesia, where Covid-19 cases are still rising. As new daily cases decline, a recovery will take place.”

Between cash, fixed income and equities, AHAM believes that equities will outperform. “It has been the worst-performing asset class. Given the sequentially improving economic environment, equities will provide the most compelling investment. Furthermore, a vaccine is expected to be developed in the next six months and this will bring about a normalisation roadmap,” says Ng.

Ong says companies that continue to do well during the pandemic will be well rewarded by investors. She believes that the demand for tech stocks will continue to drive the strong performance of the sector. Businesses such as e-commerce platforms, food delivery services, video streaming services, online supermarkets, online healthcare services, online entertainment and online education are expected to perform well in the current environment.

“Other sectors that will benefit from the pandemic will be courier services, sanitary paper product manufacturing, the ‘buy now, pay later’ industry (credit card purchases that can be settled in three or four instalments with zero interest charged) as well as bookstores,” says Ong.

“As people are spending more time at home, they tend to read more. Activity books, stationery and art supplies will be in demand as people spend time entertaining their children or developing a new hobby themselves.

“Amazon started as an online bookstore and expanded into other product categories. Today, it is one of the largest online booksellers globally. Meanwhile, publicly traded book publishing companies include Scholastic, John Wiley & Sons and Pearson plc.

“Businesses involved in the entire supply chain of personal protective equipment, ventilators, medication and supplements will also benefit. Companies providing cloud computing, robotic automation and artificial intelligence within supply chain enhancements will continue to do well.”

Sectors to avoid, she says, are airlines, hotels, gaming and travel-related sectors because these will take longer to recover as people will defer non-essential travel. It will also take a while before the retail and food and beverage sectors bounce back.

“People will think harder before going out now compared with the past as they would need to adhere to social distancing, carry hand sanitisers and wear gloves and face masks or face shields for self-protection. Hence, until a vaccine is available to the public, the retail and F&B sectors will have a long and bumpy ride,” says Ong.

Asia-Pacific funds have been performing relatively well since the start of the year. According to Lipper’s fund performance data, Asia-Pacific equity funds saw an average return of 14.11% over the six months ended July 31 while Asia-Pacific ex-Japan equity funds provided an average return of 12.17%.

By comparison, funds in Lipper’s global equity category saw an average return of 5.96% during the corresponding period. Meanwhile, Asia-Pacific bond funds provided an average return of 2.27%, compared with the 1.1% of global bond funds.

Ong says RHBAM regional funds (RHB Big Cap China Fund, RHB Shariah Asia ex-Japan Fund, RHB Dividend Valued Equity Fund and RHB Multi Asset Regular Income Fund) outperformed during the market downturn in 1Q2020 and further widened the outperformance during the market rally in April and May.

As for fixed income, RHB Dynamic Bond Mandate Fund outperformed its benchmark — the JP Morgan Asia Credit Index — during the same period. She attributes the outperformance to the team’s early recognition of the seriousness of Covid-19 in late January, its timely re-entry into the markets in late March and correct stock and sector allocation decisions.

“The RHBAM regional funds went into a defensive position earlier than most of our competitors in late January, when we saw that the situation surrounding the coronavirus was going to be a lot more serious than what the general market was expecting then,” says Ong.

She points out that in late March, markets across the world were in a panic-selling mode and investors were throwing the baby out with the bathwater. The firm’s regional investment team saw extremely attractive opportunities emerging: quality blue chips in various countries and sectors that were trading at 1997/98 Asian financial crisis or 2008 global financial crisis valuations.

As for stock and sector allocation decisions, the firm was able to identify early on that the Covid-19 pandemic would change the world and create a new normal. Thus, it identified and curated 12 important “Post Covid-19: Work, Live and Play” sub-themes that it believed would be important in the new normal, says Ong.

“In addition, we identified key category winners in each of these 12 key sub-themes through active stock picking and bottom-up research. The 12 sub-themes have proved to work well,” she adds.

The firm’s 12 key sub-themes are infrastructure, 5G, bandwidth, computer equipment, cloud computing, healthcare, e-commerce, online supermarkets, online delivery services, online gaming, online education and online entertainment.

An upcoming sector to look at is new energy, which includes the electric vehicle supply chain, ultra-high voltage electricity transmission and renewable energy, says Ong.

Leow says Principal’s Asian equity funds have performed well in the volatile market conditions. For example, the Principal Asia Pacific Dynamic Growth fund and the Principal Islamic Asia Pacific Dynamic Equity fund were up about 6.5% over one year and 20.7% and 14.5% respectively for the three months ended June.

“Our stock investments are geared towards quality companies with good business moats that can emerge strongly out of this crisis and gain market share as well as those that have demonstrated a strong ability to innovate and capture market opportunities,” he says.

“[We are also geared towards] niche companies that are long-term winners, with favourable supply discipline, little competition or possess significant brand equity as well as companies that can benefit from the new ways of playing and working post-Covid-19.”

Touching on Australia, Ong says RHBAM has a neutral to slightly underweight view on the country. She points out that the Reserve Bank of Australia has kept cash rates at 0.25% and this is likely to remain for a long period. The market will be supported by superannuation inflows and attractive yields.

“We are overweight on resources, especially iron ore and gold. We are underweight on financials, given the low interest rate environment and weak earnings expectations from banks,” she says.

“Within the property sector, we see support in the industrial property segment via demand for good quality sites, long lease tenures and positive rental revisions. The residential segment is being supported by government schemes to support first-time homebuyers. The retail segment will be under stress due to the impact from Covid-19 and rental rates will be revised downwards.”

Principal’s Leow says the Australian Security Exchange 200 Index fell 21.2% in local currency terms in March as the escalating Covid-19 cases around the world and expectations of an economic contraction led to a huge sell-off. However, from end-March to end-June, the index rebounded 16%.

“As the number of new daily Covid-19 cases has surged again, mainly in Victoria, the recovery path for the Australian economy has faced a setback. The reopening trades have been played out, given the strength of the rebound in some of the domestic companies’ share prices,” he says.

“Valuations are also not cheap. Hence, we have turned less positive on Australia and focused on companies with global market leadership and those that have the ability to solidify their market positions and emerge stronger after the downturn.”

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