Despite the coronavirus pandemic, prospects for Asia-Pacific stocks look bright beyond the short term
- While there is more pain to come for the region due to the impact of Covid-19 on supply chains, fiscal and monetary policies as well as largely solid fundamentals should support Asian markets
Separately, Singapore has set aside US$4.5 billion to help companies and households, while Indonesia, Malaysia and Taiwan have unveiled stimulus packages as well.
A larger shock to the global economy implies policy will need to step in more forcefully. We project that the US Federal Reserve will cut its interest rate by a further 50 basis points by April, with central banks in advanced economies generally following this lead.
Still, central banks in Asia may choose to wait for clearer signs of a US and euro zone slowdown. Lingering concerns over financial stability may temper responses in China and South Korea. In contrast, Japanese fiscal policy may make the Bank of Japan’s job harder.
From a bottom-up standpoint, the recent sell-off has driven valuations for the MSCI All Country Asia-Pacific ex-Japan Index below its 15-year average. The benchmark’s 12-month forward price-to-earnings ratio stands at about 13.2 times now, versus 15.8 times at the end of last year.
Similarly, the index’s price-to-book ratio has now dropped to about 1.4 times versus 1.68 times at the end of 2019 – well below its 15-year average of 1.75 times.
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With valuations more attractive after recent market swings, we have taken the opportunity to introduce into our portfolio several stocks that we have been tracking for some time.
While the sharp drop in oil prices has added to attractive valuations, our expectation is there is more pain to come. We don’t think the market has yet priced in the worst-case scenarios, with overarching macro concerns likely to weigh on sentiment and share prices further.
Of course, it’s difficult to predict how this Covid-19 situation will evolve, given uncertainty over the duration of the economic impact, extent of demand destruction and the shape of the recovery cycle. But it’s hard to see how all of this would be resolved quickly.
The potential upside is that low oil prices will further tighten supply, which should make the macro outlook more positive at some point in future when demand improves and inventory levels are worked through.
But in the short term, we expect fear and volatility to persist. Still, fear in markets is traditionally a time for long-term investors to seek valuation entry points, as indiscriminate selling drags company prices away from their intrinsic value.
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Looking beyond the short term, expected fiscal and monetary policies should support Asian markets. Largely sound fundamentals will also buffer regional economies against shocks.
Asset prices in Asia still seem reasonable compared to their global peers, while company earnings are expected to recover modestly. At the same time, themes that underpin Asia’s long-term growth remain undimmed.
Even though we expect this to be a challenging year, we continue to see bright prospects for some Asian companies given their exposure to long-term structural growth drivers. Their quality and solid fundamentals should also help tide them over during this trying period.
Flavia Cheong is head of equities (Asia-Pacific) at Aberdeen Standard Investments. Robert M. Gilhooly is senior emerging markets economist at Aberdeen Standard Investments