It seems ancient history now, but 2020 opened with a high degree of optimism for Asian markets. True, valuations were no more than reasonable given the share price gains of the previous twelve months, but conditions appeared favourable and there was a widespread consensus on a global economic recovery and a strong year ahead for corporate earnings. Well, it is obvious in hindsight that Mr Market was wrong – or was he?
The fact is that for those who held their nerve in the spring (and even more for those who used that turmoil to pick up cheap bargains and great companies being thrown out in the panic), it turned out to be a vintage year. All in all, 2020 was an extreme example of cutting through the noise and focusing on the long term.
Asia rises to the challenge
Of course, it is never simple. The spring months seemed to present an existential threat perhaps even to humanity itself, a “Day of the Triffids” moment. As it turned out, Asia has proved well up to the challenge.
Many of the more advanced Asian economies have dealt with the pandemic efficiently and effectively. Those who cite different culture and a more conformist mindset might want to reflect on the large scale events taking place in many countries in the region, even if crowds have temporarily been kept away from the Australian Open. If the US had emulated Taiwan in the minimisation of fatalities, only some 100 US citizens would have died against the over 400,000 that have.
Of course, not every Asian country has the resource and institutional depth to respond, but in the case of India and much of the ASEAN region, young populations are proving resilient (ASEAN is the Association of Southeast Asian Nations).
Asia was also remarkably adept at re-invigorating and adjusting supply chains. While economies exposed to services (fluff rather than stuff) suffered as travel, tourism, bricks and mortar retail collapsed, hard exports (i.e. goods) have been surprisingly strong.
With inventories lean, corporate earnings have proved at the least resilient, and in some cases remarkably robust. This has been particularly true in the information technology complex as the world has gone virtual: virtual work, virtual play, virtual shopping, virtual everything.
Adding to the mix has been a very benign global liquidity backdrop, led by the US Federal Reserve whose asset purchases and low interest rates have helped support the financial system. This has been accompanied by extraordinary levels of fiscal activism with governments supporting people’s incomes.
A weak dollar has added to the fuel, as has a rise in thematic investing, driven in part by the fact that the pandemic has only served to further accelerate digitalisation trends already firmly in train. Asian stock markets have ample representation of companies that benefit: computer gaming, e-payments, e-commerce, electric vehicles, as well as the enablers of the new trends such as specialists in robotics, artificial intelligence, and semiconductor testing and production.
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A long-term case for Asia
The above perhaps is history. But to understand where we are going, it helps to understand where we have been. We remain convinced of the long-term case for Asia, and that is in the knowledge of the less good things that have intervened including continued tension between the US and China (a fact of life) and the many political fissures (Hong Kong, North Korea, Myanmar).
The shorter-term outlook looks less enticing. Valuations are overall somewhat stretched, so the expected recovery in corporate earnings appears to be already well recognised by the consensus. And as we know, earnings very frequently disappoint. Furthermore, the very fact that Asia has had a “good war” over Covid means there is not the same degree of recovery potential as is possibly present elsewhere.
We would also expect most regional monetary and fiscal authorities to continue a relatively conservative stance, led by China which has recently signalled some concern over exuberant markets. In our view, they are right given distinctly “bubble-like” valuations in areas such as bio-technology and electric vehicle manufacturers.
Think differently from the crowd
In summary, we are working on the assumption of more measured progress for the region in 2021. Investors may have to work harder for positive returns as some of the long-term growth companies need to grow into their valuations.
There are also pockets of value and we see opportunities in areas that have not captured the imagination of the Robinhood brigade. As ever we are prepared to be patient, think differently from the crowd, and focus on long-term sustainability.
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