Asian Equity Market Outperformance is likely to continue
Published 2nd April 2020
Min Feng, CIIA, CEFA, Senior Investment Specialist, Nomura Asset Management Europe KVG mbH
While Europe and the USA are suffering massively from the coronavirus crisis, many Asian countries are already further ahead in terms of the outbreak’s progression and their containment measures. The pandemic in China appears to be under control for now and the situation in South Korea has improved significantly. In other major economic areas such as Taiwan, Hong Kong, and Singapore, pandemic containment also appears to be having the intended effect. Not surprisingly, most Asian equity markets have lost less than the S&P500 and the DAX so far(In the first quarter, MSCI AC Asia ex JP Index retreated 18,38% while MSCI World Developed Market Index lost 21,05%). For these reasons, we believe the Asian market outperformance is likely to continue.
Although Asian markets are suffering from the disruption to global supply chains and the slump in export demand, growth in Asia will slowdown in 2020. But this region has one major advantage: for many Asian countries, China is still the most important export market. In China, production has started up again in many places, and economic life is gradually starting to normalise. In addition, China itself has a relatively low export to GDP ratio of less than 20 percent. Domestic demand is the far more important factor driving China’s growth – and it will recover relatively quickly, boosted by stimulus measures.
Many companies in Asia are also better prepared for crises than western companies because they are significantly less indebted. Of the top 100 companies in China and Taiwan, only about half have net debt on their balance sheet, the other half has net cash positions that serve as an additional security buffer in the crisis. For comparison: In the USA and UK, 8 out of 10 companies have net debt, in Germany around 7 out of 10.
There is no question that if the pandemic continues to spread rapidly and results in a deep global recession, it will also hit the Asian markets, but the impact will be much less damaging than for most of the developed markets of North America and Europe. In addition, valuations in Asia are currently much cheaper than in the United States. The price-to-book value ratio (PB) of the MSCI AC Asia ex JP index is 1.25 (as of March 27), close to the low point seen during the crisis year 2008 and significantly lower than the PB of the S&P 500 Index (2.66). These are all good reasons why we believe the Asian markets can continue to outperform over the next few months relative to equity markets in Europe and the USA.
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