The coronavirus outbreak has caused turmoil in the global markets. Wall Street has seen its worst day in more than a decade on Monday, March 9. Also the Chinese and Asian equity markets plunged in March. We spoke to Khiem Do, Head of Asian Multi Asset at Barings, about how coronavirus is impacting the economies in Asia.
AsiaFundManagers.com: How do you assess the recent slumps on the financial markets?
Khiem Do: The Asia Pacific markets fell significantly because of two key factors: Despite the stabilisation of the Covid19 epidemic in China and the rest of Asia, investors are worried about the unfavourable economic and corporate earnings impact caused by the acceleration of net infected cases and fatalities in Italy, and potentially in Germany, France, the US, etc. In other words, this may force a number of local governments of European and/or US cities to lock their cities down for a short period of time. If so, it would result in a loss to GDP, corporate sales and profitability, both at the local and global levels, based on the intricate supply-chain production links.
The fear and panic in European and US equity markets significantly impacted on Asian counterparts. Nonetheless, we should note that, while Chinese and Asian equity markets fell in the month of March to date, they out-performed both their European and US peers. This is partly helped by much lower equity valuations in Asian markets, as well as the peaking and deceleration of the Covid-19 crisis in China and Asia, together with a concerted expansion of fiscal and monetary policies to boost their domestic economy.
AsiaFundManagers.com: What impact will Covid-19 have on the Chinese economy in 2020?
Khiem Do: We have seen a number of economists cutting their GDP estimates for China sharply. For instance, in a quarter-to-quarter comparison (ie, Q1’ 2020 vs Q4’ 2019), from the start of the year to today, China’s Q1 GDP of 6% annualised growth was cut to a current -3 to -5% p.a. decline.
That is based on the fact that most offices and factories were closed for the Lunar New Year celebration for most of the month of January. And when the Covid19 epidemic was announced, quite a large number of cities and people were forced to or self-quarantined in the month of February. In March, they only have gradually returned to work (business is now back up to about 60-70% capacity).
Now that the Covid-19 epidemic has been improving, the Chinese government has been keen to encourage workers to resume work as soon as possible. Furthermore the goverment is helping the domestic economy with more spending on infrastructure and construction projects, financial assistance to distressed small businesses, lowering their cost of borrowing, and so on.
For the full 2020 calendar year, from an initial 5.8-6% growth rate, China is more likely to grow at about 5.5%. Still a strong result, given the rather sluggish prospects of the world economy.
AsiaFundManagers.com: How long will it take for Asia and the Chinese economy to recover from the economical impact of coronavirus?
Khiem Do: It is not an easy question to answer, as we are not medical specialists.
Having said that, we believe that from May onwards, we should see a gradual resumption of Chinese exports to the rest of the world. And a strong bounce in economic activity in China as well as from the rest of the world from about June onwards. All that assuming that the Covid-19 epidemic fades away in one or two months’ time in Europe and the US and that the whole of Europe doesn’t get locked down (like Italy) and that the US doesn’t get affected too severely.
AsiaFundManagers.com: What adjustments are you currently making in your Asian equity portfolios?
Khiem Do: Our Equity investment philosophy is based on investing in the best available sustainable growth companies in our investment universe. Our analysts and fund managers are long-term investors. As such, their fundamental research is based on a detailed 5-year cash flow analysis of their target stocks, including a detailed ESG score for each stock.
As a result, in times like this, they do not tend to panic and trade. If anything, based on their stock valuation and intrinsic values, they tend to be buying when there is a wholesale distressed selling phase.
To give an example, in January, our Hong Kong-China fund managers took profit in some consumer staples stocks which rose strongly and exceeded their sell targets. In February, the indiscriminate sell-off in Chinese markets offers them a chance to add to growth stocks in the Technology sector. As at today, they remain fully invested.
AsiaFundManagers.com: Thank you very much for the interview.
Khiem is Head of Asian Multi Asset and is responsible for the management of a number of specific Asian portfolios and the Multi Asset portfolios for clients located in Asia. He was appointed to become a member of the Strategic Policy Group (SPG), the company’s global macro research and asset allocation team, in 2006. He is a member of the SPG Economic Research, Equity Research and Asset Class Research Sub Groups.
Khiem joined Barings in 1996 from Citicorp Global Asset Management in Sydney, where he was the Australian Chief Investment Officer, the chair of the Australian Asset Allocation Committee and a member of the CGAM International Asset Allocation Committee. Khiem received his BA (Hons) in Economics from Macquarie University (Australia).