HONG KONG – 2020 has been an eventful year which saw some of the toughest social, economic and political challenges in recent times. While stabilization of markets seems to be within reach with the introduction of new COVID-19 vaccines and new leadership in the US, investors should expect the process to be gradual and long as the structural changes caused by the pandemic will take time to reverse if not already permanently shifted.
Frances Donald, Global Chief Economist, Manulife Investment Management, said: “One of the most critical features of the COVID-19 recession globally is that it more disproportionately hits the services side of the economy and it was much less painful for the manufacturing side. We refer to this as the K-shape recovery going into 2021 of which sectors that provide the essentials during the pandemic, such as manufacturing, technology, will continue to grow, while those more driven by the demand and supply dynamics, such as retail and services, may continue on a downward slope.
“Overall, we expect the ongoing weakness in the US dollar and central banks likely to stay dovish in the next six months to become the more important market drivers for Asia. Given the low interest rate environment, which could be here with us for another decade or so, investors may need to take on more risk and tap higher-yielding instruments that were previously under owned, such as infrastructure and agriculture, to generate the income they seek.”
With the roll out of COVID-19 vaccines, reopening of borders and normalization of economies in Asia seem to be within reach. Ronald Chan, Chief Investment Officer, Equities, Asia (ex-Japan), Manulife Investment Management, believes staying invested and diversified will continue to benefit investors in 2021, as the expected sector rotation in Asian equities will present a wider opportunity set for capturing alpha.
“Asian equities in general are trading at 30% discount versus developed market equities1, and future earnings growth are expected to be in the high teens. This is because Asia is still benefiting from external demand, particularly when growth in developed markets will be propped up by fiscal policy and in turn support Asia exports,” said Ronald.
“In addition, it is expected that half of the Asia population will have been vaccinated by the second half of 2021, which means borders will reopen and growth within Asia will resume. Coupled with supply chain relocation and implementation of the Regional Comprehensive Economic Partnership (RCEP) free trade agreement, we can expect growth in trade within the region.
“After attracting US$20 billion of inflows in 20202, China remains a bright spot in 2021 as the economy continues to recover and driven by the three main pillars of Technology, Sustainability, and ‘Dual Circulation’ prescribed in China’s 14th five-year plan. China’s relationship with the US is expected to be about the same under a new US President. Talks and competition between the two will continue, but a Biden administration could be more predictable and less hostile. Coupled with the fact the two countries’ leaders have climate change as a common goal, we could potentially see improvements in the relationship.
“Overall, we favor North Asia over Southeast Asia in 2021 in part due to potential softening of Sino-US relations, a weak US dollar to have positive impact on procyclical currencies in the subregion, and more capital flow into China given the growth divergence it has with the rest of the world.
“Sector-wise, we believe new technology like artificial intelligence, automation, 5G, and biotech will continue to perform as a result of the pandemic and the need for businesses to adopt some of these technologies to maintain growth. There will be more attention on sustainability-related industries such as electric vehicles and battery storage and supply chain, as countries around the world place stronger emphasis on climate change. Lastly, with economic recovery on the horizon, it is worth keeping an eye on cyclical and value names such as those in the property sector.”
Negative yields in developed market bonds have made it more challenging for bond and income-focused investors, particularly in a lower for longer interest rate environment. Attention is now drawn to Asian bonds which not only offer positive yields but also higher quality investment opportunities.
Murray Collis, Deputy CIO, Fixed Income, Asia (ex-Japan), Manulife Investment Management, said: “Asian bonds are in a sweet spot compared to developed market bonds. For instance, we think Chinese bonds will continue to attract foreign inflows in 2021 from its index inclusion and yields of Indonesian and South Korean 10-year sovereign bonds are trading well above US Treasury.
“On the credit side, US dollar Asian corporate bonds are rated investment grade on average, and with the yield premium and lower drawdown relative to US credit markets that we have witnessed in 2020, we believe Asian bonds is an attractive proposition for investors globally.
“We are also seeing compelling sustainable opportunities in the Asian bonds landscape, as climate change, demographics and governance become top-of-mind themes among investors. In addition, evidence suggests that sustainable investing can achieve the same, if not better, returns versus traditional bonds. For instance, the JP Morgan ESG Asia Credit Index and the JP Morgan Asia Credit Index both have a cumulative performance of 43%3, but the former has less than half of the carbon intensity4 (196.2Tons of CO2e / $M revenue) as the latter (419.5 Tons of CO2e / $M revenue). As such, we believe Asian fixed income portfolios should not only consider ESG risks but also actively take advantage of ESG opportunities.
“News of the vaccine is positive for growth, but some trends may have changed permanently, such as more jobs shifting to permanent work-from-home model, and some business and/or factories are forever lost or relocated. We believe the strong fundamental of Asia, supportive global backdrop, and the multi-year sustainable investing trend makes Asian bonds an attractive asset class in 2021.”
1 Source: Bloomberg, 21 December 2020.
2 Source: Morningstar, December 2020. The inflow is for offshore open-ended funds not denominated in CNY.
3 Source: Bloomberg, 30 November 2020. Figures shown are in gross USD terms. Past performance is not indicative of future results. Investment involves risk. The J.P. Morgan ESG Asia Credit Index (JESG JACI) tracks the total return performance of the Asia ex-Japan USD-denominated debt instruments across the Asian Fixed Income asset class, including floating, perpetual, and subordinated bonds issued by Sovereign, Quasi-Sovereign and Corporate entities. The index applies an Environmental, Social and Governance (ESG) scoring and screening methodology to tilt toward green bond issues or issuers ranked higher on ESG criteria, and to underweight or remove issuers that rank lower.
4 Carbon intensity data sourced via Trucost ESG Analysis. Carbon intensity refers to Scope 1 & 2 Tons CO2 equivalent emissions per million USD revenues.
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