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Asset Management / Wealth Management
Asean equities set for more gains on post-Covid recovery
Confidence over vaccine rollout should boost key sectors such as tourism
Bayani S. Cruz 16 Mar 2021

The strong economic fundamentals of the Association of Southeast Asian Nations (Asean) provide promising investment opportunities for listed equities post-pandemic, although the dominance of old economy stocks may constitute a challenge.

For Asean countries, World Bank had forecast an economic growth of -4.3% for 2020 and +5.4% this year. In North Asia, which includes China, South Korea and Taiwan, economic output was expected to fall by 2% in 2020, and then rise by 8.1% in 2021.

“Asean stock markets have been outshone by their giant North Asian neighbours for a decade now, despite the fact that Asean in aggregate would be the world’s third most populous country, the sixth largest economic bloc, and the fourth largest group for trade,” says Joanna Kwok, portfolio manager at JPMorgan Asia Growth Fund. “One challenge for Asean has been that its listed equities are more exposed to so-called Old Economy industries than is the case for North Asia.  For example, with certain exceptions, Asia’s dominant tech companies tend to be listed in China, Korea, Taiwan; while Asean, together with India, houses many of the region’s most attractive banks.”

According to Robert St. Clair, strategist at Fullerton Fund Management, the strongest performing markets across Asia have been those best able to contain new Covid-19 infections (e.g., North Asia), those able to provide significant policy stimulus (such as Malaysia and Singapore) and those less impacted by very weak tourism and export demand, especially from developed markets. Thailand, for example, has suffered significantly from its high sensitivity to weak tourism demand.

“Encouragingly, all equity markets across Asean have recovered. Additional gains will likely come through as stronger GDP growth is realized, and as confidence builds surrounding a Covid-19 vaccine, which should give a significant boost to sectors like tourism, so important to Asean performance,” St. Clair says.

The Asean current valuations at 1.7x price to book are significantly lower than the Asia-Pacific ex-Japan valuations at 2.1x price to book. Asean is also trading on a lower valuation relative to its own history, whereas APAC ex-Japan is trading on a higher valuation relative to its own history. 

“Overall, we’re still constructive on the medium-term outlook for Asian equities. While valuations have recovered substantially from their lows of the first quarter of 2020, and no longer look evidently cheap, we see strong broad upwards earnings revisions around Asia at a rate last seen over a decade ago in the aftermath of the global financial crisis.  Moreover, the longer-term story is still intact as factors such as the rise of the middle class and lifestyle upgrades play increasingly significant roles in Asia’s markets,” Kwok says.

In an environment where the pandemic is becoming less of a concern, Asean equities, particularly tourism and banks, may offer positive investment opportunities.

“Conversely, while some more cyclical sectors may rally in the short term, for example, materials and energy, we would not advocate chasing them in the absence of a robust longer-term story,” Kwok says.

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