ASEAN Equities: “Opportunities in Every Crisis”
What are some of the biggest takeaways from 2020 and the COVID-19 pandemic?
Crises can offer valuable lessons to everyone, from policymakers to investors. For instance, the Global Financial Crisis taught policymakers to be more aggressive, swift and coordinated with stimulus measures when dealing with widespread macro fallout. Investors, on the other hand, have learned that old investment adages—from “don’t fight the Fed” to “buy when everyone is fearful” to “there are opportunities in every crisis”—seem to persevere.
Markets also tend to discount prices well ahead of the trough, and last year was no exception. In particular, the pandemic underscored the importance of acting quickly and efficiently to identify attractively priced opportunities in companies that are leaders or enablers of structural growth trends—particularly those with strong balance sheets and long-term earnings visibility. That said, even as crises can and often do accelerate structural trends and disruptions, they are fraught with unknowns. As such, bottom-up stock selection remains critical to navigating such periods—helping not only to identify attractive long-term opportunities, but also to avoid unwanted risks.
We have also learned and observed that the social and environmental consequences of corporate activities are increasingly impacting the success of companies, not just on the business/strategic fronts but also in terms of share price performance. The role that environmental, social and governance (ESG) issues are playing in companies’ valuations and fundamentals will likely continue to expand in years to come, with ESG becoming ever more ingrained in the way the investment industry analyzes and selects investments. We believe companies that show better or improving ESG practices are ultimately likely to command a higher premium in the market, while there may be negative implications for those that are not adapting to this structural change.
In 2020, we saw tremendous fiscal and monetary support from governments around the world. Do you expect that support to taper off anytime soon, and if so, will it have a negative impact on markets?
The answer to this question hinges on what type of recovery we see over the next few months and year. With regard to Asia, we expect to see a more synchronized recovery. Even laggards like the ASEAN market—which faced some difficulties in effectively containing the virus and was under-represented in technology leaders—will likely benefit from a more significant recovery on the back of the COVID vaccine optimism and deployment. This could provide a positive economic backdrop for a strong rebound in earnings recovery, in our view. Cyclical sectors such as commodities, which are well-represented in the ASEAN market, will likely benefit as global growth recovers.
A cautiously optimistic view of the coming months and year has naturally called into question the future of government support. However, from our observations, policymakers around the world appear committed to upholding their support given the high unemployment levels and the tentative nature of the economic recovery. With real rates more favorable in Asia, and ASEAN in particular, relative to the U.S., Asian currencies are likely to continue to be well supported—or possibly strengthen further—against the U.S. dollar. This should help reverse the significant outflows from Asia experienced last year.
Are there areas in particular where you’re seeing opportunities as demand begins to normalize?
While the crisis moderated or stalled capital expenditure plans across industries, demand normalization is creating component shortages across secular growth industries such as semiconductors, many of which have seen an acceleration in demand due to the pandemic. With the rollout of vaccinations gaining momentum around the world, travel restrictions should start to ease and corporate capital allocation, as well as supply chain diversification, should be able to recommence—leading to a new capital spending cycle. Therefore, while we are not quite out of the woods yet, we are cautiously optimistic on markets like ASEAN, whose structural growth characteristics are likely to be enhanced by a cyclical recovery.
At the same time, there are a number of longer-term reasons to be constructive on the ASEAN market, in our view. For example, the region benefits from demographic tailwinds, including a huge 600 million young population and a rapidly growing and increasingly wealthy middle class. Structural reforms in the region, and the cyclical recovery expected this year, also play fundamental roles in driving an acceleration of ASEAN’s ‘new economy’. As the new economy sectors remain under-represented and under-researched, we believe there will continue to be opportunities in companies with business models that tap into pockets of structural growth as the region launches into the era of technological ubiquity.
FIGURE 1: ASEAN—NEW ECONOMY VS. OLD ECONOMY
Source: Bloomberg. As of February 8, 2021.
Ongoing U.S.-China trade tensions, and more recently the pandemic, have also reinforced the view that supply chain diversification into ASEAN is not a ‘nice-to-have’, but essentially a ‘have-to-have’ risk mitigation strategy. As a result, we see opportunities in companies that can benefit from this structural trend that revitalizes the region’s export engine—ranging from automation solution providers in Malaysia to electronics suppliers in Thailand to machinery manufacturers in Vietnam.
What are your expectations at a macro level, and for returns, in 2021?
Markets have started this year on a strong note, carrying on the robust momentum from the final quarter of 2020. Notwithstanding the serious resurgence in COVID outbreaks across the world, the accelerating rollout of vaccinations is providing fuel for optimism that by the end of this year, the pandemic could be under control.
That said, our investment process does not include making assumptions on expected returns for markets. 2020 once again proved that ASEAN equities is an inefficient asset class. This means that there is strong alpha generation potential for active, bottom-up investors who are prepared to look at corporate earnings beyond the current one or two quarters—and instead focus on companies’ medium-term earnings potential. In our view, this approach puts investors and managers in a good position to capitalize on macro shocks and uncover opportunities in undiscovered, strong franchises.
