2020 Asian equities: risk, response and opportunity

investment viewpoints

2020 Asian equities: risk, response and opportunity

Asia Equity team -

Asia Equity team

The year 2019 was uncomfortable for equity investors who were beset by various concerns ranging from a US recession to further escalation of the China-US trade dispute. Despite the concerns, equity markets climbed the wall of worry to post respectable returns in 2019. Equity markets’ good performance was supported by US Federal Reserve policy comprised of a series of interest rate cuts, and a finalisation of the Phase One trade deal that removed the key uncertainty of further escalation between the world’s two largest economies.

2020 looks to repeat the 2019 experience in terms of the variety of concerns. Investor confidence was tested in early January when Middle East tensions sharply escalated. Investors are now confronted by the viral outbreak in Wuhan, China. Fearing a pandemic, the market sell-off reflects investors trying to price in the impact of the virus.

The macro conditions are conducive for Asian equities, with Asian policy makers having policy flexibility to support economic growth if needed.

While the impact of the Novel Coronavirus (2019-nCoV) outbreak will be unknown for some time, the history of such previous viral outbreaks suggests the economic and financial market impact are short and temporary. We also note that the Chinese authorities’ response has improved remarkably from the obfuscation and secrecy exhibited during the SARS outbreak. More concretely, China has made containing and resolving the outbreak its top priority, and has mobilised its considerable resources to this end.

The macro conditions are conducive for Asian equities, with Asian policy makers having policy flexibility to support economic growth if needed. The region’s policy makers have managed its fiscal and monetary policies relatively well over the last two years, to guard against sharp economic slowdown while allowing their currencies to act as shock absorbers. With inflation remaining subdued, policy makers have room to be accommodative in 2020.

 

Sectoral outlook

We were overweight in Financials over the past two years given our differentiated view on the sector’s earnings growth. This overweight was reduced over the course of 2019 as the investment thesis played out and the tailwinds for earnings eased. In 2020, we still see opportunities in the sector with reasonable earnings coupled with undemanding valuation. One trend that will persist is the dispersion in returns within the sector, with the stronger players getting stronger at the expense of weaker peers.

Information Technology was the best performing sector in 2019 as investors looked through the weakness of 2019 earnings in anticipation of a better 2020. In semiconductors and memory chips, we see some optimism for recovery as 5G telecommunication deployment may help soften overall smartphone market weakness in 2020. Still, we remain cautious on the overall smartphone supply chain given the lack of new applications that would demand 5G speeds. We continue to view the internet and eCommerce spaces favorably given structural growth.

Consumer Discretionary was the second best performing sector in Asia in 2019, significantly outperforming Consumer Staples. We expect to see this trend continue in 2020 with well-positioned Chinese discretionary names benefiting from the multi-year trend of premiumisation. Within Staples we have a preference for companies with proven execution capabilities and that are exposed to trading up opportunities.

As with 2019, there are a variety of risks but also opportunities in Asia, the region accounting for the majority of global growth. Asian equities continue to look attractive due to continued earnings growth and undemanding valuations, in our opinion.

 

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