Perspective

What are the opportunities in Asia as global lockdowns eased?


Asian Multi-Asset Team

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With major regions taking modest steps in easing lockdown restrictions, sentiment has turned more positive in recent weeks.  Global markets rebounded to levels since the coronavirus pandemic first took hold in early March. Activity remains weak, but there are tentative signs of improvement in data while a bounce back in activity is expected in Q3.

Looming worries on second wave of infections, renewed US-China spat 

However, beyond this point uncertainty abounds. Our view is that the virus is contained, but epidemiologists stress the risks of a second wave of infection.  At the same time, markets remain volatile and sensitive to geopolitical headlines and resurgent US-China tensions.

Cyclical recovery plays for equities

For equities, the asset class remains supported by the unprecedented amount of fiscal and monetary stimuli authorities globally have implemented.  That said, we believe markets still need to process the significant demand shock caused by the outbreak.  We want to wait for more visibility on the economic and corporate impact before adding back risk considerably.

Nonetheless, pockets of opportunities remain.  We have come across an interesting broadband service provider in the region which boasts strong dividend growth on the back of increasing market share.  Given the nature of the business, we expect dividend payout to remain relatively stable, albeit the weaker market environment.

Elsewhere, we less favour banking names amid the headwinds of the falling interest rates and challenging economic conditions.  Loan growth in Hong Kong is expected to slow on falling personal and corporate demand while net interest margin could also narrow given lower yields and interest rates.

For REITs, the recent legislation to allow for floating of REITs in the China onshore market is a welcomed development.   Assets involved at the initial stage focus largely on large-scale infrastructure projects to ensure financial stability, and it is likely to expand to private real estates in commercial and residential areas later on.  These should provide us with new stable income opportunities in the sector going forward.

We also remain cautious on sectors related to travel, leisure and hospitality.

Asian, EM names potential beneficiaries of global stimulus

Moving to fixed income, we remain positive on credit.  Specifically, the US Federal Reserve has announced programs that would allow the central bank to purchase both investment grade and recently downgraded high yield (aka “fallen angels”) corporate debt.

This large-scale stimulus has resulted in strong tightening of spreads in US credit, but we have yet to see the same degree of tightening in Asia.  With stronger fundamentals and more attractive valuation, we believe that a large amount of liquidity in developed markets could result in spill-over support into Asian and EM credit.

Opportunities are available across the region.  For example, we are keeping an eye on Macau gaming names as the Macau government may relax travel measures in the coming months.  We are also attracted to some names in Indonesia and the Middle East within the materials and energy sector, which offer attractive yields in addition to strong credit profiles and state support.

Active portfolio management helps unearth the opportunities

Against the backdrop of volatility as markets grappled with uncertainties of Covid-19 and its impact on growth, we have been defensively positioned by favouring higher quality credit names, striking a balance between defensiveness and the agility to go offence on those securities with attractive risk/reward profiles that we believe are able to navigate the credit cycle.

We continue to focus on bottom-up selection in order to avoid those names with fallen angel risk or downgrade pressure.  Liquidity conditions in the corporate credit space have improved due to the unprecedented stimulus package from the Fed and global policy makers.  Overall valuation in the credit market now looks fair, yet we still see pockets of opportunities by acquiring high-quality names.

 

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