A just-right post-Covid recovery in APAC

The outlook for Asian equities is a 'Goldilocks' scenario: Neither too hot, nor too cold, it looks just right.

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.”