Few moments in history can provide a
template for financial markets as 2020 drew to a close. It was a year of
extreme shocks and wild volatility. A global pandemic caused an unprecedented
recession, followed by an equally steep recovery in many markets. Markets
cratered and then soared, driven by fiscal stimulus programmes and
extraordinarily expansionist monetary policy. Now, a broad and sustainable
global economic recovery hinges on the anticipated success of the vaccines
which are being approved and rolled out.
In sharp contrast, 2021 should be a year of
solid recovery. The effectiveness of the new vaccines will naturally be the
most significant driver of this turnaround. While there may be bumps along the
road – and some limited further lockdowns may be required in Asia – markets are
looking beyond these to a lasting recovery in the second half.
Against this increasingly benign backdrop,
the outlook for Asian equities is a ‘Goldilocks’ scenario: “Neither too hot,
nor too cold, it looks just right,” said Manishi Raychaudhuri, Head of Asia
Pacific Equity Research at BNP Paribas. “While some risks do remain, we think
investors will be looking closely at Asian equities– particularly those from
emerging economies in the region.”
The monetary setting
Monetary conditions should be supportive
globally. To sustain growth, central banks appear to be prepared to fine-tune
stimulus measures by responding asymmetrically to developments: taking action
on bad economic numbers but remaining passive when news is positive, so as to
maintain an accommodative stance. Generally, this means that current low
interest rates and national asset purchase programmes are likely to continue
through the year, albeit possibly not to the full extent anticipated earlier in
the year.
“We do not expect a swift turnaround from super-low interest rates in any ASEAN countries in 2021.”
Dr. Arup Raha, Head of ASEAN Economics, BNP Paribas
“We expect Malaysia to post a negative
[inflation] rate in 2020, something not seen in 50 years,” said Dr. Arup Raha,
Head of ASEAN Economics at BNP Paribas. “Thailand is also likely to remain in
deflation, and even though this also occurred in 2009 and 2015, the current
pace indicates one of lowest rates in the last 50 years or so. Indonesia too,
where inflation tends to be volatile, is likely to see the lowest rate in
decades.” Arup does not expect a swift turnaround from super-low interest rates
in any Association of Southeast Asian Nations (ASEAN) countries in 2021.
Many governments are also supporting the
recovery with an enhanced commitment to sustainability, introducing new policy
measures to invest in green infrastructure and provide cleaner energy and job
opportunities over the long term.
“In this environment, we advise equity
investors in global equities to pivot from a growth approach to a value
approach,” said Manishi. “Stocks that benefited from their positioning during
the pandemic should give way to those that appear undervalued compared to their
fundamentals. These include financials
and energy, as well as consumer sub-sectors that have suffered during the
pandemic, especially in leisure and tourism.”
Optimal conditions for Asia
The combination of a revival in global
growth, moderate inflation, continued fiscal and monetary accommodation and US
dollar depreciation signal an ideal scenario for emerging markets equities –
particularly those from Asia.
BNP Paribas economists believe that China
will be a key driver of regional growth, with forecasts indicating that China
will be the only major economy to register positive GDP growth in 2020.
“The country’s ‘dual circulation’ policy –
designed to reduce reliance on imports through greater domestic consumption –
has ensured that retail sales have been positive since August,” said XD Chen,
Chief China Economist at BNP Paribas. “More broadly, China stands out from the rest of the world, in terms of
both growth and monetary policy. We expect GDP growth of 8.6% in 2021 and 5.3%
in 2022, with the authorities balancing liquidity availability against
financial risk control.”
We expect Asian semicon. and China ‘internal circulation’ baskets to rise
Sources: Bloomberg, BNP Paribas. Past performance is not indicative of future performance
Based on this growth outlook, China is
looking to initiate a slow exit from stimulus with liquidity tightening from
May and bank lending quotas also narrowing.
Markets around the region
“Our core overweight positions are on
China, India and Korea. However we are looking at the ASEAN markets more
positively than before,” said Manishi. “These stand to gain from a recovery in
commodities prices, particularly Indonesia. Economies geared towards tourism,
like Thailand, will also return to growth as leisure travel recovers.”
Markets in Korea and Taiwan benefited from
their high concentrations of tech and healthcare companies during the
pandemic. However, earnings growth in Taiwan is likely to moderate from these
highs, but recovering Korean exports should maintain growth in that market,
particularly as more of the country’s exports now head to China.
Hong Kong’s dominant financial and
property sectors usually achieve only muted earnings growth when rates and
inflation are low. But the Hang Seng Index does look cheaper than MSCI China
because of the more expensive A-shares in the MSCI benchmark.
Potential bumps on the road
What are the potential risks to this rosy
scenario? With so much depending on vaccine effectiveness and distribution,
lower-than-expected efficacy or delays to the roll-out could sap expected
inflation. On the other hand, the US dollar may not depreciate as assumed if
inflation spikes too fast. At the same time, geopolitical risks, such as
renewed US-China tensions or Brexit developments, could drive investors back
to safer investments. China also harbours some policy risks, including
stronger antitrust laws or premature credit tightening, which could damage
business confidence.
So while it’s possible that Asian equities
could grow too hot or too cold during the year ahead, explained Manishi: “Our
base case scenario is that they will remain just right.”