For Asian economies, 2021 looks set to be a year of regeneration and renewal. The Covid-19 crisis has brought vast disruption to people’s lives and livelihoods, to businesses and to economies. The region’s competent management of the virus has allowed economic activity to resume, but businesses still need to find their footing in a changed world.
There is cautious optimism about the path of the recovery in Asia. While some industries, such as travel and tourism, remain depressed, others, such as retail, have rebounded quickly. Economic statistics are improving across the region. Some countries, such as China, even saw positive economic growth in 2020 and look set to repeat this in 2021.
There is still some concern on the virus. James Thom, manager at Aberdeen New Dawn Investment Trust, says: “The course of the pandemic is the key question for Asia today. At the moment, it is looking relatively encouraging for Asia and the vaccine is a positive, but we still have some way to go and Asia remains vulnerable to waves of infection.”
If the virus remains supressed, Asian governments will be able to turn their attention to other priorities. First on their list may be to navigate the change in US administration. It is fair to say that US/China relations were both frosty and unpredictable under the presidency of Donald Trump. Joe Biden is likely to bring a change of tone, even if he does not take a substantive change in approach.
A more measured approach to international relations should be good for the region’s economies. Orsen Karnburisudthi, manager at Aberdeen New Thai Investment Trust, says: “Any less uncertainty on global trade is a positive for Thailand. Around a third of Thailand’s GDP is driven by global trade so the uncertainty over past years has been a negative headwind across a variety of products, from agricultural products to automobiles [and from] electronics to fisheries. An improvement in trade will be positive not only for the Thai economy, but also for neighbouring countries.”
Thom agrees: “In aggregate, we believe the new administration will be marginally positive from a macro standpoint. We anticipate tensions will remain, but Biden should be a bit more multilateral and predictable in his dealings with China.”
In spite of a marginal thawing in the heated relationship between China and the US, Yoojeong Oh, manager of Aberdeen Asian Income Fund, expects that China’s desire for self-reliance will grow: “Supply chain vulnerabilities were highlighted during the first stage of the pandemic and through the US trade war. We expect a stronger focus on boosting domestic consumption and localisation of new technology supply chains.” Nowhere is this clearer than in the growth of China’s nascent semiconductor industry. With its flagship telco Huawei cut off from US semiconductor companies, China has chosen to build its own.
This is innovation of necessity, but there is likely to be plenty of other innovation this year. In common with the US and EU, Asian government stimulus measures have come with green strings attached. China has now committed to being carbon neutral by 2060. Yoojeong says she is already seeing this reflected in corporate behaviour and it is likely to be an important trend in the year ahead.
The pandemic has prompted a shift from offline to online activities, whether that is shopping or gaming, video content or remote working. Thom says: “Asia has many companies that are active in these areas and we have several of them in the New Dawn portfolio. The pandemic has not been all bad news for the corporate sector. It has brought about opportunity as well.”
The corporate sector appears to be emerging in good health, given the shock of 2020. Thom adds: “Earnings contracted quite a bit last year and into negative territory, but the market is expecting earnings in Asia to rebound by more than 20 per cent in 2021, perhaps as much as 25 per cent… From a fundamental earnings growth perspective, there is cause for optimism.”
Aberdeen Standard Investments’ Asian managers have been repositioning their portfolios to adjust to this new reality. Karnburisudthi says that while he trimmed riskier positions, such as banks and property developers, early in the pandemic, he has been strategically adding in areas that may benefit from a recovery. That includes Airports of Thailand, which is poised to benefit as tourism resumes.
Oh has also made use of price volatility to buy companies sold down during indiscriminate market sell-offs. She says: “We were quick to pare back exposure to leisure areas, such as hospitality REITs [real estate investment trusts] and to sectors where dividends were suspended by the regulators, such as financials. We topped up some domestic China growth names, which are benefitting from the consumption story. We have also backed technology hardware companies that are beneficiaries of the increased use of cloud computing and data traffic.”
Thom has found interesting ideas in the healthcare sector – including makers of equipment, such as ventilators, going into intensive care units, or companies involved in manufacturing treatments or testing equipment – and now holds several of these in the portfolio.
However, there is no question of wholesale changes in any of the trusts. Managers take time to understand and perform due diligence on companies over the years and ensure they are invested in companies where the business model has the potential to withstand disruption. In most cases, there should be no need to make significant adjustments in response to a crisis.
Overall, there is much to be optimistic about in the year ahead. Thom concludes: “Asia is still home to many attractive long-term structural growth stories, which have the potential to underpin growth in the consumer sector, in the technology sector, in the healthcare sector and in the green and renewables space. These are multi-year, long-term drivers of growth and that will provide a level of support no matter what comes next.”
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