The MSCI AC Asia ex-Japan Index tumbled 18% in 1Q20 due to the rapid spread of the coronavirus pandemic. The stunning rebound since then was even more striking, underpinned by unwavering expectations that the global economy would bounce back once the pandemic is under control, as well as the swift and aggressive responses from the central banks and governments.
We believe the worst has passed and the collapse in corporate profits has likely bottomed too. Asia ex-Japan’s GDP is expected to rebound from 0.7% in 2020 to 5.4% in 2021, with North Asia economies taking the lead. Corporate earnings are also expected to rebound by 24.9% in 2021 from -2.9% in 2020.
Notably, technology stocks led the market rebound in 2020, reflecting a transition to an increasingly technology-driven economy in the region as well as the world. The COVID-19 pandemic has hastened the digital transformation across consumer spending and behaviour, and consequently accelerated the demand for new technology infrastructure.
In our view, these secular growth themes remain an opportunity for investors. Within the region, we believe markets such as China that have a higher exposure to these secular growth themes will continue to outperform their peers.
We are positive on the internet retail industry as the coronavirus has hastened the structural shift in consumer behaviour towards online retail.
Well-positioned to benefit from increased demand for social media and streaming entertainment.
The global economy is still some quarters away from returning to pre-pandemic levels, weighed down by renewed outbreaks of infections and introduction of targeted restrictions in hot spots. China is the only exception, having already returned to pre-pandemic levels by mid-2020. In fact, we expect China’s economy to expand 7.5% in 2021, posting the fastest expansion since 2013.
China’s recent economic data points to continued recovery in its manufacturing and services sectors. In 2021, we expect the economic recovery to further broaden to domestic consumption. This is also in line with China’s 14th Five-Year plan to foster a new, dual circulation development architecture which will focus on stimulating domestic consumption while relying less on global integration. Meanwhile, improving China’s technological strength is also one of the priorities on the target lists through 2035.
On the monetary front, we expect the People’s Bank of China (PBOC) to slow its monetary policy easing and shift the focus to ensuring financial stability from growth support as the local economy has already returned to pre-pandemic levels. Thus, the frequency and pace of interest rates cuts and lowering of banks’ reserve requirement ratio would likely be much reduced in 2021 as compared with the first half of 2020.
While the risks of geopolitical tensions, unpredictability of the COVID-19 pandemic and rising credit excesses remain, China’s continued economic recovery, coupled with supportive fiscal and monetary policies should provide a conducive environment for Chinese corporate earnings and consequently the stock market. Notably, China’s corporate earnings are projected to rebound from -2.3% in 2020 to +19.1% in 2021, led by the Consumer Discretionary and Communications Services sectors. We expect these sectors to be supported by both government policies and sector-specific growth opportunities. In addition, we also see attractive value in the Industrial and Insurance sectors with both projected to post robust earnings growth in 2021.
A potential headwind though for Chinese equities may be the rising valuation. Chinese stocks are no longer as cheap relative to the historical valuation range after the strong rally in 2020. Notably, MSCI China is trading at 2021 price-to-earnings ratio of 15.2x, the highest level since 2009. Nevertheless, the market still looks undemanding when compared to global peers’ average of 19.3x.
We are neutral on Hong Kong equities in 2021. While the vaccine news flow is encouraging, the battered tourism sector might take longer to recover and weigh on Hong Kong given the economy's high tourism exposure. Still, the downside is limited given Hong Kong’s undemanding valuations. The revamp of the Hang Seng Index to include more technology/internet/healthcare constituent stocks could also bring long-term positive impact to the Hong Kong market.
Given their better pandemic management, the North Asian economies had generally been more resilient when compared to global peers. Notably, Taiwan and South Korea’s economies were relatively unscathed by the pandemic, with Taiwan expected to post a GDP growth of 1.6% in 2020 and South Korea’s GDP to contract by just 1.1%.
Read MoreIn addition, South Korea and Taiwan are well-positioned to benefit from the strong technology sector as they are the largest and most advanced producers of semiconductor chips which are the critical components of electronics devices.
On a relative basis, we believe that South Korea offers a better risk-reward than Taiwan in 2021. The improving economy will lend support to South Korea’s corporate earnings, with earnings growth accelerating from 19.1% in 2020 to 41.7% in 2021. In contrast, Taiwan’s corporate earnings will only grow by 13.2% in 2021. South Korea is also trading at attractive FY21E price-to-book ratio of 1.2x, compared to Taiwan at 2.3x. We believe that investors have yet to fully discount South Korea’s strong earning recovery and thus the upside risks will likely be higher. We are overweight on South Korea and neutral on Taiwan.
Due to the influx of liquidity, India’s stock market has been rising since March 2020 despite only passing the peak of its elongated first wave of COVID-19 infections in September 2020. The daily new cases are slowing down in India and the economy is expected to normalise and return to positive year-on-year growth in July–September 2021. That said, until a vaccine emerges for the mass population, India remains highly vulnerable given its large population and weak healthcare infrastructure.
Read MorePositively, India’s corporate earnings downgrades have largely stabilised. Earnings are expected to strongly rebound to +40.7% in 2021 from -7.9% in 2020, underpinned by the Information Technology, Consumer Staples and Oil & Gas sectors. However, we are mindful of India’s demanding valuations, which leaves little room for earnings disappointment. Thus, we are neutral on the market given the balanced risk-reward.
The performance of Singapore equities is expected to stabilise after the steep pull-back witnessed in 2020. With GDP growth projected to rebound from -5.7% in 2020 to 4.5% in 2021, the improving economy should help to arrest the decline. Nevertheless, the upside may be capped by the market’s significant exposure to cyclical equities. Any meaningful rebound would kick in only when there is a broader recovery of the global economy. Still, the downside is limited as MSCI Singapore trades at FY21E price-to-book ratio of 1.1x as at end-November 2020, in line with historical averages. As such, we are neutral on Singapore.
Read MoreSectors wise, Singapore banks may continue to face pressure on interest income although concerns on non-performing loans should abate as the economy recovers. Meanwhile, the real estate investment trusts (REITs) remain a fertile ground for dividend plays. In particular, the performance of industrial and infrastructure-related REITs should remain resilient while the retail REITs could also gradually recover from increasing shopper traffic.
Malaysia’s GDP growth is projected to rebound 5.1% in 2021 after the 5.4% retreat in 2020. Malaysian equities were under pressure last year but the downside was mitigated by the outperforming glove sector which witnessed supernormal profits following the surge in demand and selling prices for their products arising from the COVID-19 pandemic. The glove manufacturers could continue to lend support to the market in 2021 barring the risk of a windfall tax on the sector. Meanwhile, the fragile coalition government is also adding to the political uncertainties that could weigh on investor sentiment. Having said that, Malaysian equities are trading on relatively reasonable valuation. Given the balanced risk-reward, we are neutral on Malaysia.
Indonesia’s economy is expected to rebound to positive territory in 2021 after the recession in 2020. Apart from monetary and fiscal support, the passing of the Omnibus law may also help to attract new investments and bring about long-term economic benefits. Nevertheless, there are lingering concerns on the COVID-19 situation which prevent us from turning overly optimistic on the market. Still, the effective implementation of a vaccine programme could help mitigate the risk. Hence, we are neutral on Indonesia.
The Philippine economy has been hit with stringent COVID-19 lockdown measures last year but is anticipated to improve on easing mobility restrictions and the reopening of the tourism sector. In addition, the recovery will be supported by the PHP 1.1 trillion allotment for infrastructure projects included in the 2021 General Appropriations Bill. While corporate earnings revision has yet to stabilise, the inexpensive market valuation should limit the downside, which supports our neutral stance on the market.
The external-oriented Thai economy has been significantly affected by the COVID-19 pandemic, especially the tourism sector. The prevailing political uncertainties are also expected to stall megaprojects and long-term growth initiatives. Meanwhile, the market is relatively more expensive than its ASEAN peers and when compared to its historical valuation range. In view of the above, we are underweight on Thailand.
Source: Bloomberg I November 2020
Source: Bloomberg I November 2020
| Country | 2021E EPS Growth (%) | 2021E Valuations | ||
|---|---|---|---|---|
| P/E (x) | P/B (x) | Dividend Yield (%) | ||
| MSCI Asia ex-Japan | 24.9% | 15.8 | 1.7 | 1.9% |
| China | 19.1% | 15.2 | 1.8 | 1.5% |
| Hong Kong | 29.7% | 16.5 | 1.2 | 2.7% |
| South Korea | 41.7% | 13.2 | 1.2 | 1.7% |
| Taiwan | 13.2% | 17.4 | 2.3 | 2.9% |
| India | 40.7% | 20.3 | 2.9 | 1.3% |
| Singapore | 42.0% | 14.3 | 1.1 | 3.5% |
| Malaysia | 13.0% | 16.3 | 1.6 | 3.1% |
| Thailand | 39.3% | 19.4 | 1.7 | 2.2% |
| Philippines | 39.3% | 19.0 | 1.7 | 1.6% |
| Indonesia | 31.3% | 15.5 | 2.2 | 2.7% |
Sources: Bloomberg I November 2020
Source: Bloomberg I November 2020
Source: Bloomberg I November 2020