Managers' views

Covid-19: Companies are providing little concrete guidance on 2020 outlook

Toby Hudson

Toby Hudson

Head of Asian ex Japan Equity Investments

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The recent acceleration in Covid-19 case numbers in Europe and North America has undermined earlier confidence in China’s apparently effective control of their outbreak. This risk is plunging much of the broader global economy into a recession as governments move to “lock down” their populations to limit transmission. The duration of this economic shock and the impact on corporate profitability is very hard to predict today, but as the spread of cases eventually slows, and markets gain more confidence in governments’ responses, we would expect to see a sharp rebound in equity markets.

China slightly ahead on recovery

New cases in China have fallen and industrial capacity is almost back to pre-crisis levels. We would expect a gradual pick-up in domestic consumption as day-to-day life is slowly normalised. With China taking the pain of its lock-down first, it is slightly ahead of the curve. However, some segments of the domestic economy will take longer to normalise. There are risks of a secondary spike in infections if the lock-down is eased too quickly.

The export sectors face a demand shock as Western countries lock down, hitting employment, income and investment spending if the downturn lasts for more than a few months. We would expect more stimulus in China, with increased spending in areas like infrastructure and measures to support household incomes and private consumption.

Company earnings likely to be a write-off this year

Given the lack of visibility on the global spread of Covid-19, companies are providing little concrete guidance on their outlook for 2020. In our interaction with management teams, we have sought to understand what measures they have been taking to deal with the crisis and how well-placed they are to ride out the downturn, operationally and financially. For many companies, this year’s earnings are likely to be something of a write-off. Markets will be willing to look through this crisis so long as there is scope for a more “normalised” level of profitability over the medium term.

Increasingly positive towards technology names in China

In terms of strategy, with China possessing such a large, diverse domestic market that in many cases can be relatively insulated, this has been the first area that we have been adding to, especially our preferred consumer names at more attractive levels. Given the longer-term supportive trends for technology demand, we have become increasingly positive towards this area. Much of the optimism around 5G roll-out in 2020 has gone and, with expectations and valuations more realistic, we see scope for upside over the medium term.

Valuations in Southeast Asia yet to look compelling

Valuations in Southeast Asia have been hit very hard in the recent sell-off, with headline multiples approaching past crisis lows. However, there is very heavy exposure of these equity markets to banks and energy stocks. With interest rates being cut to support growth, and credit risks increasing as GDP growth slows, bank earnings and return on equity (ROE) are likely to be under pressure structurally as well as cyclically, while the outlook for oil prices remains unpredictable given geopolitics. Share prices for the smaller number of better-quality domestic consumer names have now started to correct as well, but valuations are not yet compelling.


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