Beyond China’s shores, Asian economies are reopening at a very fast pace. As the restriction lifting leads to a new peak of mobility since the start of the pandemic, there is further room for recovery which would in turn propel consumption growth, according to Morgan Stanley.
Its economists Chetan Ahya, Derrick Kam and Jonathan Cheung note in its Asia economics mid-year outlook that activity in the contact-intensive services segment is likely to rebound quickly, lifting employment. “These jobs tend to be on the middle to the low end of the income spectrum, so the bounce in activity will help ensure a broad-based upturn in consumption,” they add.
Capital expenditure, which is the other key component of domestic demand, will still be on a recovery path, albeit at more moderate rates, with a transition of the underlying driver from exports to consumption, the economists highlight. “While central banks in the region are starting to normalise policy, we don’t think that monetary policy is entering into restrictive territory nor do we see a disruptive pace of rate hikes ahead.”
Initially, Asian central banks were not expecting to follow the US Federal Reserve (Fed) in its tightening as inflationary pressures were benign. However, the pressure from the Fed is larger than just rate hikes, as the Fed is tapering at the same time, which is adding significant pressure on Asian assets, write Natixis economists Alicia Garcia Herrero and Trinh Nguyen.
“Risk premium has risen substantially, and the US dollar has appreciated strongly, weakening Asia foreign exchange (FX) versus the US dollar, and leading to capital outflows since the start of the year, especially in bonds.
“Shocks from geopolitics led to a sharper increase of inflationary pressures and caused Asian central banks to reconsider their rather mild monetary stance, especially as the tolerance for FX weakening vanishes with higher consumer purchasing index.”
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According to Natixis, Indonesia and India are more affected by the Fed’s tightening regarding the impact on their short-term rates while Taiwan, Japan and South Korea are more insulated. These economies’ robust current account surplus shields the depreciating pressures from a strong US dollar backed by the Fed. Meanwhile, Malaysia and Thailand are also well-positioned as their exports in goods can be a “shock absorber”, the economists add.
While the Asia equity markets will be dominated by macroeconomic concerns like rising inflation, China’s growth pressures as well as heightened geopolitics, AXA Investment Management fund manager Simon Weston says there are reasons to be positive. For one, most of the long-term structural investment themes within Asia remain intact, despite macro concerns.
“In addition, valuations in Asia are already discounting many of these concerns, trading at valuation multiples which are significantly lower both relative to its own history and other markets — particularly the developed markets of Europe in the US. We think Asia continues to offer significant yield opportunities in what continues to be an income-starved world despite recent action in bond markets,” says Weston.
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Asean remains attractive investment destination
Within Asia, Asean is one of the economies that were poised to present compelling long-term opportunities for investors. Collectively the sixth-largest economy in the world with a combined GDP of US$3 trillion ($4.13 trillion) and a population of over 600 million, the market offers favourable demographics, a growing middle class as well as infrastructure development underpinning its growth.
Aside from Singapore, Asean also consists of Malaysia, Indonesia, the Philippines, Thailand, Brunei, Laos, Cambodia, Vietnam and Myanmar.
The dynamics of Asean’s opening-up recovery have further to run but the region is very much open for business, says UBS senior Asean economist Edward Teather. “We believe that Asean remains an attractive investment destination and we see a positive net inflow of foreign direct investments into the region as a sign of resilience in the context of global headwinds.”
He says that inflation seems to be less of a concern for Asean than in the Americas and Europe but the firm is keeping an eye on food price developments. “Should China’s Covid-linked lockdowns persist, we may see near-term setbacks and sequential downward pressure on growth. Looking ahead, with mobility restrictions easing and a benign credit cycle, our forecast of better economic outcomes for the second half of the year remains on track,” says Teather.
Asean is Morgan Stanley’s most overweight region within the Asia Pacific ex-Japan focus list as the market is a beneficiary of the higher inflation and resource-constrained global picture. In addition, Asean stands to gain from its favourable macro-stability position and growth supported by reopening.
Offering a stagflation hedge and domestic demand buffers, Morgan Stanley economists believe Asean is relatively better-positioned than North Asia in 2022 and 2023, especially Indonesia, Malaysia and the Philippines. This comes as the growth drivers shift from exports to domestic demand and from commodity importers to commodity exporters.
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For commodity exporters like Indonesia and Malaysia, they will see a boost in their terms of trade, enjoy improved corporate earnings and generate more capital to support private investment. Higher commodity prices will also lift fiscal revenues, reducing the pressures for governments to cut spending for fiscal consolidation. This improvement in terms of trade also means that the rate hikes undertaken by the central banks will not be disruptive to private sector spending, says Morgan Stanley.
Vietnam’s turbo-charged stock market
While it may not be the most popular market, Vietnam has outperformed all major regional indices in the decade. The market has nearly quadrupled in size since the start of 2012, with trading recently exceeding US$1 billion a day, according to HSBC global research analysts Herald van der Linde, Joy Wang and Shuo Han Tan.
Among other reasons, the outperformance is due to the market’s ability to eke out earnings growth during the global pandemic in 2020 when other markets faced a decline in profits. In 2021, the capitalisation of the stock market surpassed US$350 billion, exceeding 120% of the country’s GDP.
The Vietnam stock market used to be highly concentrated around a few large state-owned enterprises. In 2013, the top five accounted for 52% of the total market capitalisation. This year, however, the number is closer to 25%. The top 10 market caps now account for less than 20% of overall turnover, which is low, the analysts note.
“Contrary to what many believe, the investors that pushed this market higher were not foreign but local. The stock market has seen a surge in retail investors and the number of retail accounts more than doubled between December 2018 and 2021,” they add.
These local investors account for as much as 87% of all trading in the market, while foreigners make up the remaining 13%. As a result of the influx in local investors, the average daily turnover on the Ho Chi Minh Stock Exchange has seen a tenfold rise, recently crossing the US$1 billion mark — 10 times the average of US$100 million in daily trading seen in early 2020.
Vietnam’s role in global supply chains has been increasing for years and is set to expand further. In recent years, the country has seen multiple inward relocations of manufacturing facilities to get access to cheaper labour and land, standing out in terms of grabbing the market share of global exports.
In March, Vietnam’s export value reached US$34.7 billion, greater than the exports of US$18.3 billion from Shenzhen, the biggest exporter city in China.
Foreign direct investments have been a key driver of Vietnam’s economic growth, the analysts add. “In the past few years, Vietnam has made it easier to set up a business and has simplified land registration and loan processes. This, along with a low cost of production, has made it the place to set up a new factory.”
The analysts say that Vietnam is doing its best to reform the securities market and bring it closer to international standards. The FTSE added Vietnam to a watch list in September 2018 for possible reclassification to secondary emerging-market status, due in September.
“The market is yet to make it onto MSCI’s watch list, but if required reforms are implemented, it might meet the necessary criteria ahead of May 2023 (before the next review). Being added to MSCI’s watch list could see increased fund flows into the market. But global funds already have built decent exposure to Vietnam equities,” the analysts add.
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Cover photo: Peter Nguyen/Unsplash
