The Outlook of Asia Equities May Improve in 2023 - Fund Manager Interview
Q: Principal Hong Kong Investment Management Team
A: Jeffrey Chong, Head of Equity, Absolute Return Strategy, Principal Asset Management (S) Pte Ltd
Q: How do you see the Asia economy overall?
A: Heading into 2023, Asian markets are in a better position to deal with many of the global challenges than developed markets. On economic growth concerns and recession risks, we expect most Asian countries to avoid outright recessions, due to the boost provided by post-Covid reopening. Recall that vaccination rates were slow to pick up across most of Asia, and it is only now that Asian countries are beginning to accept tourist arrivals and full resumption of crowd activities. Our expectation is that China will begin to relax Covid restrictions sometime towards the late 1Q 2023, providing much-needed vitality to the domestic economy, and easing bottlenecks across the global supply chains. This tailwind from economic reopening should persist through 2023.
On the inflation front and challenges of the strong US Dollar, we expect most Asian currencies to withstand the current bout of dollar strength without a crisis. Asian expenditures related to Covid-19 were measured compared to many other countries in the world. Government debts and foreign debts, as they stand, are not particularly high on a global scale. The nature of inflation faced by most Asian countries are also different from those of developed markets, where rentals and wage costs are exerting tremendous upward pressure on overall prices. While Asia faces commodity and energy cost pressure, the effects are offset to some extent by benefits in the form of trade surpluses for export countries like Malaysia, Indonesia and Thailand. In turn, the healthy current account surpluses and the slightly negative real interest rates provide support for many local currencies against the surging USD.
Q: What are your views on Asian equities for the first half of 2023 compared to global market?
A: Looking beyond this year, while uncertainties remain, 2023 could be a better year ahead especially for Asia equities. Asia will likely avoid a recession and any easing in US monetary policy will support a more supportive environment for risk assets.
The current equity market correction ranks as one of the most severe in terms of duration and depth since the 1990s. Asia’s valuation is inexpensive at 11x FY23 PER and this assumes EPS growth of 7% to 9% in 2023. It may be hard for the US Fed to get incrementally more hawkish from here unless inflation worsens (not our base case). We expect inflation to moderate in the next few months.
The global economy is expected to experience a downturn as a result of the tightening monetary policy in many countries especially the US. Risk assets in general including equities will likely remain under pressure in the near term until we see a reprieve from the persistently high inflation that many countries are currently experiencing.
The countries that are most vulnerable to the recession risk in the West will be the export-oriented countries like Taiwan and Korea. However, some countries in Asia are likely to perform better than others. ASEAN will be better shielded as these countries are recovering from the pandemic, re-opening their borders, seeing positive FDI and in some cases, benefitting from relatively high commodity prices. For India, it is also better insulated from the effects of the West due to its still large buoyant domestic economy which is recovering from the pandemic.
Q: How do you see the outlook for China's economy? What are the main risk factors to watch out for?
A: China is experiencing a weak economic recovery from the depths of the lockdown in various major cities in 2Q2022 with growth below potential. Recovery is also being hampered by the zero-Covid policy and the weak property market. The economy has suffered from rising unemployment and weaker consumption. On the other hand, the government has been increasingly more supportive of the economy and is easing policy to boost growth. There are several policies targeted at the property sector and boosting infrastructure spending.
For China to see a stronger economy, the government will have to gradually relax the zeroCovid policy and come up with more stimulus measures to boost property and consumption. Post the 20th Party Congress, the gradual relaxation of the zero Covid policy is possible. Investors will be watching closely the developments in the relaxation of the zero-Covid policy and further easing of the property sector as this will have an impact on consumer confidence.
Q: How would the fund position to defend downside risks while capturing upside potential?
A: We like companies with growth visibility, earnings/margin resilience, and support from dividends or share buybacks. Companies that can cope in an inflationary environment by managing costs and raising prices would re-rate. In this environment, we like:
- Industries where we could be close to the end of earnings downgrades (e.g., selective tech, platforms) and those where the rate of change is getting less negative
- Sectors with policy tailwinds or where demand is recovering, e.g., renewables, tourism-related ideas
- Beneficiaries of domestic demand, e.g., India, China, ASEAN
Q: As Asia is catching up on ESG investing, will the ESG theme create alpha opportunities?
A: ESG as an investment strategy would likely provide ample alpha opportunities over the next decade. As ESG awareness becomes more mainstream within the investment community, more funds would be redirected towards companies which have made ESG a corporate prerogative, or taken steps to execute plans to make themselves more sustainable. The stocks of these companies would eventually capture a valuation premium over their less prepared industry peers or competitors. The benefits of ESG investing also accrue in the form of risk mitigation. New policies and initiatives are being rolled out by government bodies and regulators to address environmental, social and governance concerns. Consumers are shunning or boycotting brands which are caught up in headline-grabbing incidents involving undesirable corporate behaviours. Hence Investing in companies which take sustainability seriously reduces the risks that the share prices of companies suffer the negative consequences of poor ESG practices.
Finally, ESG investing also serves as a lens through which we unearth good quality companies managed by superior management. Coincidentally, the leaders of corporates which have taken the lead in ESG initiatives are usually the ones demonstrating vision, leadership and ability to execute long-term plans. These qualities are essential for corporate leaders looking to deliver value and provide leadership to solve the issues of the world in the years ahead.
Jeffrey Chong
Head of Equity
Absolute Return Strategy
Principal Asset Management (S) Pte Ltd