The Covid-19 pandemic has shocked the Asia-Pacific region. The efforts to contain the virus spread led to a significant cutback of economic activity in most of the countries. We spoke to Flavia Cheong, Head of Equities Asia Pacific, Aberdeen Standard Investments, about the outlook for the region and where investors can find attractive opportunties despite these uncertain times.
AsiaFundManagers.com: Where should investors be looking to invest in the Asia Pacific region?
Flavia Cheong: Investors should differentiate on quality, by which we mean companies with strong balance sheets, low levels of debt and sustainable competitive advantages operating in sectors with structural growth prospects. They tend to be more resilient during downturns.
Go active! As financial distress exposes weaker firms, investors will need to assess opportunities stock by stock. It underlines why the second half of this year will be a time for active management. Passive funds can’t avoid weaker companies because they hold everything, good and bad.
Investors will need to study companies’ balance sheets, debt maturities, cash flows and the long-term sustainability of their strategy. Considering risks and opportunities around environment, social and governance (ESG) factors will also remain important.
We have found managements adept at addressing key risks and how to mitigate them are the ones that have avoided the blow-ups and created shareholder value. Owning quality remains the best way to mitigate risk, in our view. Good quality companies are also more likely consolidate market share at the expense of weaker players as the recovery progresses.
AsiaFundManagers.com: Do you think other broader global issue, such as COVID-19, will impact global investing?
Flavia Cheong: How the world deals with the pandemic is one issue – the longer the pandemic persists, the disruption will stymie recovery in the second half of 2020. A second wave of infections in countries where curbs were lifted too early remains a key risk.
A flare-up of US-China tensions (and run-up to the US presidential election this November) is another risk. While sustained stimuli from governments and central banks via fiscal and monetary will offer continued support to markets, investors should remain cautious.
So far, Asian policymakers have followed a ‘lite’ version of the advanced economy playbook. But the region’s central bankers have room to escalate their response because they don’t face the same constraints as other major economies (i.e. interest rates aren’t close to zero).
AsiaFundManagers.com: How are Asian equities responding to the current crisis?
Flavia Cheong: Asia Pacific equities have done surprisingly well since Q1, buoyed by stimulus measures. Last month (July), markets cheered the European Union’s agreement on a €750 billion recovery fund and the US government’s proposal of another US$1 trillion in stimulus. Rising vaccine hopes further lifted sentiment.
Nevertheless, a resurgence in Covid-19 infections in several countries raised concern that the fragile economic recovery could stall. Mounting global geopolitical risk also capped gains, as tensions rose between China and Australia, India and the US.
The tech-heavy Taiwan bourse led the region as technology stocks benefited from upbeat earnings results. Chipmakers Taiwan Semiconductor Manufacturing Co and Samsung Electronics were further boosted by US-based Intel’s plans to start outsourcing some production of its next-generation chips.
China was also one of the best performers, on the back of booming retail-investor interest and positive economic data, especially in industrial production. Chinese internet companies have benefitted from changing patterns of consumer spending during the pandemic (and even after restrictions were relaxed). More people working from home have driven demand for tech hardware and services such as cloud storage (benefiting data centres).
AsiaFundManagers.com: Where are the opportunities in Asian equities?
Flavia Cheong: Consumer discretionary stocks such as autos, retailers, travel and tourism have been hit hard. However, amid a gradual loosening of lockdown measures, we are seeing nascent signs of a recovery in demand in some markets.
Domestic flights have resumed in China, while certain retailers should continue to prosper as consumers stock up on electronics to facilitate working from home. E-commerce sales are also likely to remain resilient, although not for retailers that have been slow to embrace it.
We continue to like the technology sector, which remains underpinned by structural growth drivers such as cloud computing, data centres, 5G and digital interconnectivity. However, we are mindful that tech is becoming a politically sensitive issue in the run-up to the US election, amid disruptive pressure on Huawei and increasing friction between the US and China.
Otherwise, we also like premium consumption in segments such as health care, wealth management and insurance; and exposures to meet the region’s growing urbanisation and infrastructure needs.
ESG, and responsible investing, have become hot topics in recent years. This will become even more so as the coronavirus pandemic forces us to rethink our priorities when pursuing economic growth.
As governments around the world pledge trillions of dollars to support businesses and save jobs, this presents a one-in-a-million opportunity to make a substantial commitment towards a sustainable future.