With recent Phase 3 vaccine trials indicating positive results, analyst Lim Say Boon of CGS-CIMB sees developed markets (DMs) and emerging markets (EMs) to be largely vaccinated by 2021 and 2022 respectively. This in addition to a Biden victory in the recent US Presidential Elections signal upsides for Asean and the Asia-Pacific markets going forward.
Although the timing of the announcements was within previous market expectations, the very act – and the claimed high levels of effectiveness – gives the market more visibility on forward earnings. The announcement of such positive developments reduces the equities risk premium, and hence supports higher stock prices in general,” writes Lim on 19 November. Pfizer claims that its candidate has 90% effectiveness while Moderna claims its candidate has 94.5%.
Regional EMs are also cheering the election of Democrat Joe Biden in the US Presidential Elections. Biden is expected to show more restraint towards China vis-a-vis his predecessor. “A less caustic US-China trade relationship can only be positive for global growth,” writes RHB analyst Andrey Wijaya on 19 November. MSCI Asean rallied 12% to 689 points from 614 points in the last week compared to just about 6% in the MSCI EM Index during the elections.
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But the Democrats' difficulty in winning the senate from the Republicans is likely to lead to a “split congress”, preventing Biden from passing higher taxes and fiscal stimulus. The latter, in particular, will mean the continuation of low interest rates as monetary policy from the US Federal Reserve takes the lead in recovery. Wijaya believes that the resulting weakening of the US Dollar would highlight to investors the structural weakness of the greenback, prompting investors to take a second look at EM assets, which are trading at better value than DM plays.
In any case, Wijaya and his team have made economic recovery their base case in 2021 - albeit an uneven one. So bullish is RHB’s economics team that they predict that the global economy could be entering a new growth cycle that may last another 7-10 years. They see China taking the lead in the global economic recovery, as Beijing’s promotion of domestic consumption appears to bear fruit as Chinese consumers lead the country’s Covid-19 recovery.
Real GDP in the Asean-5 countries - Indonesia, Malaysia, the Philippines, Singapore and Thailand - is seen to bounce back to 6.3% in 2021 from a 4.1% contraction in 2020. “The recovery is likely to be lifted by a turnaround in global demand for ASEAN-5 exports and y-o-y higher private consumption, aided by local stimulus measures,” Wijaya says. Countries that dealt better with the Covid-19 spread are expected to recover more quickly than the stragglers.
For equities, the main beneficiaries of these developments will likely be from “laggard sectors” rather than former market-leaders info tech and consumer discretionary, Lim of CGS-CIMB argues. Wijaya sees Banks, infrastructure, land transport operators, and selective food & beverage (F&B) and retail counters as preferred plays, with aviation, real estate and tourism & hospitality following suit only towards the end of 2021. Energy plays, says Lim, will also do well.
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Consequently, Lim and Wijaya sees investors rotating from growth stocks to value, cyclical and recovery plays going forward. Additionally, they also believe that investors will rotate from DMs to EMs as well, with ASEAN foreign portfolio funds having initially deserted ASEAN EMs for DM safe havens. Wijaya predicts gradual portfolio shifts back to EMs in 2021.
Singapore and Indonesia are likely to be the most significant beneficiaries of this shift. The prominence of large cylicals in Singapore - once a regional equity laggard - such as finance and real estate will prove a good destination for regional investors looking to pivot to value. Indonesia, on the other hand, allures investors with its strong growth potential, stemming from massive infrastructure needs, a large domestic market and upside potential for the Rupiah.
Such bullishness however, warns Wijaya, all rides on there being no prolonged Covid-19 pandemic going forward. Domestic political risks in Malaysia and Thailand are also potential downsides for both countries, as the world waits with bated breath as to whether a peaceful transfer of power will occur in the US as incumbent Donald Trump refuses to concede the polls. Malaysia is also vulnerable to oil price volatility and potentially weaker sovereign risk ratings.
