Asian equities have witnessed strong performance over the past year, supported by early Covid-19 lockdowns and subsequent early economic reopening. China, in particular, performed exceptionally well in managing both the health and the economic impact of the pandemic. Strict and early lockdowns kept infections under control in 2020, which allowed China to reopen early and led to a swift recovery in all major economic metrics. In fact, China was the only G20 economy with positive GDP last year, with growth of 2.3%. This spilled over to other Asian markets, which in general outperformed developed markets.
Looking ahead, real GDP growth in Asia Ex-Japan is forecast to return to its pre-Covid-19 level of 5.4% in 2021. Growth in China and in India is estimated at 8-9% year-on-year, outpacing growth in other countries within the region – while contributing most to global GDP. Compared to expected developed market growth of 4.2%, the environment continues to look favourable for Asian equities.
While Asia is expected to contribute 60% to global growth by 2030, Asian equities are still under-represented in global benchmarks and investor portfolios. Below, we outline the reasons why investors should be confident of continued Asian dominance, as well as some of the structural drivers powering the rapidly growing region.
Covid-19 under better control
In North Asia, especially in China, the rate of infection seems to be under control. These markets keep on reopening to a greater extent than elsewhere globally. We expect the Chinese economy to deliver strong growth this year as it benefits from both cyclical and structural tailwinds – in areas such as industrial automation, electric vehicles and components and supply chain localisation.
RCEP zone is the future of Asia
Asia is now taking on the role of the new engine of global growth, with China the hub for trade in the region. The RCEP – Regional Comprehensive Economic Partnership – will bring Asia a step closer to becoming an integrated trading zone like the EU. This trade deal will reduce economic frictions and, according to analysts, add US$500bn annually to world trade. The biggest beneficiaries will be RECP members – China, Japan, South Korea, Australia, New Zealand, as well as 10 other Southeast Asian countries.
More room for monetary easing
Compared to other regions, conditions in Asia would allow a further stimulus for the economy – if needed. Higher general yield levels, relatively stable foreign exchange markets and low inflation levels are supportive drivers of further monetary easings to boost economic growth.
Consumption powers Asian growth
The rising purchasing power of Asian consumers indicates opportunities in many consumer-related businesses. This goes far beyond the purely internet-related names Asia is known for and includes among others sportswear and staples consumption. One lockdown trend we expect to continue in Asia is the rise of e-commerce. Its penetration is unlikely to recede, as consumers are hooked on the added convenience of these services. Asian consumers are also expected to re-engage in offline activities badly affected by the pandemic.
Technology meets sustainability
Tech was one of the main winners in 2020, benefitting from an accelerated shift in consumer behaviour, and we are optimistic about the longer-term outlook for many of the main Asian players. New technology like AI, automation, 5G and biotech will continue to perform as a result of the pandemic. Meanwhile, the digitisation of many areas of the economy will continue. We expect digital adoption in South East Asia to catch up with China, which drives demand for increased processor power, bandwidth and storage. There will be more attention on sustainability-related industries such as electric vehicles, battery storage and supply chain, as countries around the world place stronger emphasis on climate change. Indeed, the commitment to reduce greenhouse gas emission will most likely accelerate the development and adoption of electric vehicles and energy efficient products, also inducing growth in the ecosystem of renewable energy and resources.
Cheap equities and rising currency
Moreover, from a valuation perspective, Asian equities are trading at 20% discount against developed market equities – with future earnings growth expected to be higher. This is mainly because Asia is still benefiting from external demand, particularly when growth in DM will be propped up by fiscal policy that will in turn support Asian exports. In combination with a weak US dollar, which according to analyst consensus is expected to stay under pressure in 2021, the scene seems to be set for a bright EM equity year. Historically, there has been a high correlation between a weak US dollar and EM equities outperforming DM equivalents.