We have seen Asian markets succumb to panic selling over the past few weeks, as investors remained on the edge over the covid-19 crisis. The sell-off came despite a “whatever it takes” stimulus stance from the US Federal Reserve and other major central banks. At the same time, we are seeing stronger responses from governments in Asia and elsewhere in tackling covid-19, including two-week quarantine for travellers arriving from overseas, border closures, complete country lockdowns. Below are some further observations:
- Global financial markets continue to be shaken by the ramifications stemming from the spread of the coronavirus. Case numbers have risen sharply in the West, and while they appear stable in China, cases continue to rise slowly across the rest of the Asia Pacific.
- Strict containment measures already in place suggest that cases should not accelerate in advanced Asia. However, under-reporting in emerging Asia is a risk.
- The coronavirus shock on China now appears much larger than initially thought. Outside of China, available economic data continue to defy gravity, with the Asian trade and industry data holding up better than expected. Sharply lower export order and PMIs suggest however that it is only a matter of time before it deteriorates.
- India has also had to put in place social distancing measures. Schools, universities and major retail outlets have been shut down. These measures will no doubt be reflected in the data in the coming months. We expect policy measures along the lines of income support for migrant and low income workers as well as tax breaks and debt repayment moratoriums for corporates to be announced soon.
- Alongside more aggressive measures put in place in the US and Europe, policy across the Asia Pacific generally continues to be more supportive. Most central banks in advanced Asia have now cut to their lower bands, while temporary dollar swap lines have been established with the Fed.
- In emerging Asia, central banks have been more cautious, largely reflecting concerns about capital outflows and forex depreciation
- The People’s Bank of China declined to ease further, but we think that policy will likely move to a somewhat looser stance as the drag from the US and Europe on Chinese manufacturing becomes clearer. In particular, the duration of the shock greatly increases risks and this may swing the balance between growth and medium-term financial stability risks.
What does this mean for the holdings of Aberdeen Standard Asia Focus PLC?
In the latest corporate results reporting season, we have seen companies give cautious guidance across the region in terms of the outlook for earnings. Some sectors have been more resilient than others, in particular the IT sector in China and Taiwan. Still, we are cautious because global growth and supply chain worries amid the covid-19 outbreak and subdued domestic consumption make the earnings expectations vulnerable to further cuts. We would expect the first seven months of 2020 to be a challenging period for earnings and volatility in markets to remain elevated.
While we are cautious given the recent capitulation in global markets, as long-term investors, we are sticking to our approach rather than resorting to knee-jerk responses. We have used the opportunity to add to a few names we like but haven’t made any dramatic changes to the portfolio. Part of our confidence comes from the knowledge that while the viral outbreak may be a very severe disruption, it is likely to be temporary, and our companies typically have very strong balance sheets and robust cash-flows to weather the storm. Furthermore, Asia, which bore the initial brunt, is closer to the path of recovery than the rest of the world. Where we have had lower conviction for a while, we haven’t been afraid to sell but this is very much at the margin of the portfolio.
Overall we would expect this year to be a challenging one for the Trust’s performance, not least because of our focus on smaller companies which by their nature are more illiquid and can therefore sell-off more aggressively at times like these. Encouragingly, governments and central banks across Asia have been quick to respond with easing measures and fiscal stimulus. There remains room to loosen policy further and expand fiscal support where needed. Decisive responses from policymakers, including the Federal Reserve’s pre-emptive rate cut and the US’ US$2 trillion virus stimulus bill, should help cushion the impact somewhat.
Looking further out, we remain confident about the opportunities arising from the structural trends that will shape Asia’s growth, be that in terms of consumer demand, new technological advancements, and infrastructure development. Our holdings’ solid balance sheets, clear competitive edges and healthy cash flows will help buffer against the current shock.
By Hugh Young, investment manager of Aberdeen Standard Asia Focus PLC, March 2020
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