Q4) Amid the coronavirus outbreak, what are you taking into account?
Corporate sentiment in China and the rest of Asia continues to fluctuate around cautious optimism, as measured by the most recent PMI around the region.7 The continued positive sentiment from the end of last year to the beginning of this year comes from the corporate capex cycle’s bottoming out and subsequent recovery, the significant uncertainty and overhand being removed from the signing of the Phase 1 deal and overall inventory restocking.
Despite the relative optimism, I will be closely watching the February PMI data in Asian countries to see if there’s any deterioration due to the coronavirus. Remember that China did not release any trade data in January, instead choosing to release the monthly data with the February data.
As for supply chain disruption in Asia, we are watching this very closely as the coronavirus spreads to places like South Korea. Already, we have seen certain companies in the auto and electronics industries announce temporary closures.
On the other hand, Chinese factory workers have slowly started to return to work as of mid-Feb and I expect this pace to quicken over the coming few weeks. Notably, I don’t expect to see any permanent shifts in supply chains away from China as business leaders have for the most part have viewed the coronavirus as an idiosyncratic headache rather than a game changing catalyst.
Another very important positive catalyst that we are looking out for is the electronics industry inventory re-stocking and deployment and roll-out of 5G infrastructure in the 2H of 2020, which will start a fresh replacement cycle.
Market and investment implications
Investors can continue to expect global market volatility and gyration due to reports of the coronavirus spreading. There is downside risk to equities especially in developed markets like the US where the S&P recently hit an all-time high. Although the new infection cases in China appears to have started its path towards remediation, there are other pockets of contagion around the world that will cause near-term market anxiety.
In order to counter economic risks and slowdown, central banks around the world continue to be in a synchronized monetary easing mode, which explains why investors remain in a risk-on mode and risk assets have performed well year-to-date. This is the first time since 2008 that almost every major central bank around the world is easing either through interest rate cuts or pumping liquidity into the system. Already this year, we have seen central banks in China, Mexico and Thailand cut their benchmark rates. Other central banks are set to follow in place like Indonesia, Korea and India.
In addition, governments such as India and China have taken the extra step to boost domestic demand through fiscal stimulus in the form of tax cuts. Loose monetary policy coupled with fiscal stimulus tends to boost economic activity and is correlated with improving corporate earnings and decent risk asset performance. Any material downside risk to risk assets is somewhat buffeted by expansionary monetary policies taken by central banks around the world.
We think that the coronavirus may depress markets, and that could uncover bargain opportunities for a limited time only, as markets can very quickly bounce back once investors shift their focus back to Asia’s attractive valuations and strong longer-term growth fundamentals.
Although the 2020 economic horizon has been clouded by the coronavirus, I continue to expect 2020 corporate earnings to be strong on a year over year basis. The coronavirus is a near-term negative catalyst that puts a damper on economic activity and corporate earnings, however once this cloud dissipates, I expect commercial activity to normalize.
For the rest of 2020, it’s important that investors examine the economic fundamentals in Asia – and I argue that they are meaningfully improving from last year. I continue to see an earnings and growth recovery led by the manufacturing and trade sectors. In the second half of 2020, we will start to see the positive impact from the semiconductor industry cycles ramping up, companies re-stocking their inventories and the emergence and commercialization of 5G technologies and the robust impact it will have on Asian electronics and technology companies.