Asia Pacific equities may have rallied 13% in the first six weeks of the year, but fears of a rise in interest rates have erased their solid gains, says Winnie Chiu, equities adviser at Indosuez Wealth Management’s markets, investments and structuring division.
“The Asia Pacific markets have been relatively flat since the middle of February. Asia in particular has been weak due to a number of factors, including policy tightening, inflationary worries and internet regulations,” adds Chiu.
However, underpinned by anticipation of better earnings, Asia Pacific stocks are expected to do better in the year ahead. Speaking at Indosuez Wealth Management’s 2H2021 outlook presentation, held virtually, Chiu notes that earnings estimates have been revised upwards by 5% this year and 4% in 2022, led by Taiwan and Australia equity markets.
Not all markets are likely to do better. Earnings from the Philippines, Indonesia and Hong Kong companies have been lowered largely due to the pandemic, she adds.
Across the sectors, Chiu believes that semiconductors, industrial segments, consumer goods and healthcare will see healthy growth within the Asia Pacific region.
“Semiconductors are no longer simply components; they are strategic resources that all major economies must secure. They have become the backbone of new technology, and are made for robotics, autonomous driving, 5G and digital ecosystems. So, getting hold of thinner, faster and more powerful semiconductor chips will [offer the] best position to lead the markets,” she says.
On healthcare, Chiu notes that China’s healthcare market continues to expand rapidly, driven mainly by its ageing population, economic growth and widespread adoption of health insurance. “It is the plan of the Chinese government by 2030 to create a RMB16 billion ($3.3 billion) healthcare ecosystem. This initiative could translate into additional life years and will have a huge impact on productivity and economic development in China,” she says.
Within the industrial segments, Chiu prefers natural gas, heavy machinery and mining; and for consumer goods, she prefers sport apparel, property management services and selected consumer staples.
Chiu remains bullish on the world’s second largest economy, China, expanding her optimism from just tech stocks, which she had highlighted at Indosuez’s previous outlook conference in March. “China is too big and too distinct to be ignored, especially in the medium to long term. This actually would provide buying opportunities for global investors who want to leverage the years of urbanisation and economic growth in China,” she says.
“We would suggest a more balanced approach right now, instead of over-allocation to specific sectors. We think that value stocks will eventually outperform on the macro recovery and also [offer] higher yields,” she adds.
See: China tech stocks to steal the show: Indosuez
Despite the “very unfortunate situation” in India caused by the pandemic, the rest of Asia, not just China, should continue to do well, says Arjan de Boer, head of markets, investments and structuring in Asia, at Indosuez.
“One of the drivers is really the rising, affluent middle class that we see in Greater China. That accounts for a large amount of consumer spending.” “So, we continue to be cautiously optimistic about the region, albeit we have always believed that a well-balanced and diversified portfolio is the way to weather any headwind,” he adds.
All that glitters
With global market recovery on an upswing, yields have been moving “really quickly”, notes Davis Hall, head of Asia capital markets at Indosuez.
That has been a negative for gold. “Gold has actually been underperforming as a precious metal… It’s in a consolidation phase and it’s pausing, but it’s not losing its benefit [in the] long term,” he says. Instead, leading the recovery are commodities, with whispers of a “commodity supercycle” underway.
“Obviously, the industrial metals are hot — red hot,” says Hall. “Commodities are leading the recovery. Even platinum and palladium have doubled and outperformed gold.”
The popularity of the two metals is significant because of their illiquidity and extreme volatility, he adds. “They’re not for everyone because they’re extremely volatile, and the supply sources are somewhat monopolistic. There are very, very few producers.”
The stage is set for commodities to shine, says Hall. “We’re coming out of almost a world war situation of global growth shock. So, I think it’s fair to extrapolate that commodity currencies are going to run hot. I’m afraid they’re a little too high to chase today, but [in the] short term, people are still going to look to them as alternatives to some of the IT shares.”
Apart from cryptocurrency assets, commodities have been the bestperforming asset class over the past year, surpassing equities and bonds. But aside from the “memecoins” that follow the whims of crypto proponent Elon Musk, Hall points to China’s trials with its digital yuan.
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Last month, China’s e-commerce giant JD.com started paying some of its staff in digital currency. Last October, Shenzhen handed out RMB10 million worth of digital currency to 500,000 residents, who could then use the money to shop at certain retailers. Notably, China is exploring expiration dates for the digital currency, which means it will expire if not spent within a certain period.
“I think the US really should pay attention,” says Hall. “Because with all of these cheques that they’ve sent out to people, there is a risk that the cheques don’t get spent, and people start to save money out of fear… because Covid-19 was a real shock for those who didn’t have savings.”
“For now, it [the digital yuan] is very much a domestic project and experiment. But of course, this is what they want to roll out for the Beijing Winter Olympics in 2022. The foreigners come in, hopefully, to enjoy the Olympics and buy the local currency in this manner. The technology is extraordinary,” he says.
However, Hall warns that the US, which has been holding sway over the global financial system via the US dollar for decades, is the “last country on the planet” that wants to see digital currencies succeed. “They want to continue to believe that they can keep the dollar as the world’s reserve currency, but I think those days are numbered,” he says.
"The whole Bitcoin and crypto fervour at the moment demonstrates that people want something in limited supply that can’t simply be printed and become worthless,” says Hall. “Digital currency technology is on its way.”
‘Generous Joe’
To be sure, today’s optimistic market largely draws its lustre from US President Joe Biden’s US$1.9 trillion ($2.54 trillion) Covid-19 relief bill, which cleared the way for stimulus cheques and vaccine aid from March.
“Hats off to Joe Biden; he’s done an incredible job, the markets are very, very happy. His honeymoon period has been fantastic,” says Hall, reflecting on Biden’s 100th day in office last week.
But things are changing, he adds, urging a rethink of the impact on inflation and US debt. “I think we need to really think about what’s the aftermath of all of this stimulus,” he says. According to Hall, the Bank for International Settlements, a bank for central banks, says managers of central bank reserves have, for the third consecutive quarter, reduced the amount of US dollars as a component of their reserves to below 60%.
“So, I really don’t think people will be hanging on to dollars going forward,” he says. “There’s going to be more angst in the second half of this year about the creditworthiness of the US dollar or how much premium investors are going to require from the Fed, and the ability of the US government to finance what looks like a runaway problem,” says Hall, who stated last year that Covid-19 has brought about “the end of US exceptionalism”.
See also: Covid-19 brings the end of US exceptionalism
“It already costs a billion dollars a day [for the US] to finance and service the existing debt. And Biden wants to do another US$1.9 trillion. So, this is a great concern, which is one of the reasons why the dollar has not been stronger,” says Hall
