2021 Investment Outlook: Right time for Asian equities?

Right time for Asian equities

Mike Shiao, CIO of the Asia Equity team (HK) outlines his views on the opportunities he sees within the Asian equity markets. He believes 2021 is the right time for Asian equities thanks to an improving economic outlook and  favourable external environment. In particular, Asian consumers are expected to drive economic growth while, at the same time, environmental, social and governance (ESG) issues are continuing to gain traction.

Key takeaways
Economic growth is improving across the region and will gather pace in 2021.
Consumers will drive the growth recovery on the back of both cyclical and structural factors.
Policy makers are focusing on sustainability and notable progress has been made in promoting ESG standards.

During a year with an unprecedented pandemic and ongoing geopolitical tensions, Asia ex-Japan equities did well returning almost 30% between April and September1, after a tough first quarter. North Asia led the rally thanks to effective containment measures and a fast economic recovery, while the rest of Asia has rebounded despite continuing to fight the initial waves of the pandemic. Even though many uncertainties remain, we expect the region to see an improvement in economic prospects in 2021, as governments balance growth concerns with public health risk. In particular, we believe Asian consumers will drive the growth recovery on the back of cyclical and structural drivers. Meanwhile, environmental, social and governance (ESG) issues are on top of many investors’ minds and we believe there will see increasing efforts to improve ESG standards across the region.     

Improving economic prospects in 2021

The Asia ex-Japan region was hard hit by COVID-19 with real GDP only expected to grow 0.8% (year-on-year) in 2020, the slowest expansion in years. Despite this, the underlying trend is in fact more encouraging. The region’s aggregate manufacturing PMI has been on an upward trend since April, and the consensus forecast expects real GDP growth to return to its pre-COVID-19 level of 5.4% in 20212

In China and other parts of North Asia, the rate of infection is under control. These markets have reopened to a greater extent than elsewhere in the region, and economic activity levels are normalising. We expect the Chinese economy to deliver strong growth next year as it benefits from both cyclical and structural tailwinds. Furthermore, a new economic strategy of “dual circulation” has been announced which intends to build a strong domestic market that is more open to the outside world.  This is expected to become a key policy initiative in China’s five-year plan to be published in 2021. 

In the rest of Asia, including India and most ASEAN countries, lockdown measures have been partially removed, leading to better economic activity levels. In India, for instance, the manufacturing PMI (September) rose to its highest reading since January 2012, and a broad range of indicators from power demand to rail freight all posted positive growth (year-on-year). We believe these indicators will continue to show encouraging signs in 2021, as the economy recovers from a low base. Furthermore, these countries will experience a strong boost, if a reliable vaccine becomes available. 

Meanwhile, economic policies are expected to remain accommodative in 2021, as the Federal Reserve (Fed) keeps its monetary policy loose for an prolonged period, helping to relieve the pressure on central banks in the region to normalise rates. The increase we are seeing  in the US money supply will boost liquidity and encourage capital inflows into the region, in our view.  

Consumers to take the lead

We believe Asian consumers will take the lead in driving growth in 2021. With the COVID-19 situation under control, Chinese consumers are expected to re-engage in offline activities that have been badly affected by the pandemic. Regional governments across the region are helping by promoting consumption via policy initiatives. In October, we also saw Hong Kong and Singapore established a travel bubble that will allow a quarantine-free air route while other destinations with similar case rates are expected to follow suit. 

Besides these cyclical factors, we expect structural drivers including - digitalization, premiumization, urbanization, experience seeking and wellness - to also fuel consumption growth. These drivers remained largely intact despite the pandemic, and some such as digitalization and wellness are being accelerated. We anticipate the consumer market in China will double its size by 2030 while the rest Asia will also provide a fertile ground for consumer growth thanks to favourable demographics and improving infrastructure.  

An ESG lens

The Asia ex-Japan region consists of many emerging or developing economies. A strong focus on achieving fast growth and a high standard of living means that ESG developments are often left behind. This has changed rapidly in recent years with a growing awareness that meaningful changes are needed to tackle sustainability challenges from environmental degradation to social inequality.  

A growing number of stock exchanges in the region have introduced some form of ESG information disclosure within their listing rules. Such progress is particularly prominent in Hong Kong, with the stock exchange adopting a “comply or explain” approach to ESG information disclosure in 2016 and this year, has strengthened its reporting regime further. In Thailand, the stock exchange is now ranked among the top 10 exchanges globally as regards issuers’ ESG disclosures3 while back in 2012, it was only ranked 31st out of 35. As such, the average ESG disclosure rate in Asia is broadly in line with the rest of the world, according to Goldman Sachs.

In China, we believe efforts to promote ESG development will gain traction with a strengthening of regulations aimed at improving ESG disclosures among Chinese companies. In fact, the China Securities Regulatory Commission (CSRC) is expected to publish guidelines for mandatory corporate disclosure on ESG issues by end of this year. In addition, we believe continued financial liberalization to attract more foreign investors will lead to a rising awareness and improvements in ESG standards.  

Finally, we believe there are key uncertainties surrounding the public health outlook. The availability of a reliable vaccine could lead to a faster normalization of consumer activities which would lift growth prospects across the board. Alternatively, the region could be hit by further waves of infections, particularly in countries that still see a high number of reported cases. This would moderate global demand again which would dampen the trade sector and cast some downside risks to our more sanguine views.  

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

1 Source: Bloomberg, Invesco. As of September 2020.
2 Source: Bloomberg, Invesco. As of October 2020.
3 Source: Corporate Knights. As of December 2019.

All data is as at 31.10.2020 and sourced from Invesco unless otherwise stated.