The strong rebound in economies and exports has meant that certain parts of Asia (China, South Korea, Taiwan) have recovered well, while more domestically-orientated countries have struggled. That has caused a rotation into cyclical areas of the market, which has benefited a value-orientated based approach. That is one of the main reasons why the T. Rowe Price Asset Allocation Committee moved to an overweight position in value.
Overall, the Asia ex-Japan region has performed well as a quick response to the coronavirus pandemic has allowed it to open up much quicker than developed nations. However, the fortunes of the region have been more mixed in 2021, as the world tentatively returns to a form of normality.
Chris Kushlis, Emerging Markets Sovereign Analyst at T. Rowe Price, said increasing demand for exported goods had fuelled the recovery in some Asian economies. China has been the main beneficiary, but South Korea, Taiwan, and Malaysia have also seen a strong recovery.
That doesn’t mean, however, that those countries have been without difficulties. Small-scale outbreaks of the virus are still putting a strain on local economies, while also restricting domestic activity and mobility.
But things have been far worse in economies that are more domestically driven. In places like the Philippines, Indonesia and India, the recovery has been slower as exports in relation to GDP are considerably lower.
‘Indonesia has done a little bit better because it is more of a commodity exporter, so it has been able to benefit from rising commodity prices this year. In general, however, countries that have endured significant waves of coronavirus outbreaks have struggled’ Chris pointed out.
Thailand is a special case, he continued. While the country has done well with exports, its tourism sector has been hit hard and we don’t expect that to recover until at least 2022.
‘Vietnam has figured out the formula for attracting manufacturing that some of the other South-East Asian countries, like Indonesia, have struggled to figure out’Chris Kushlis, Emerging Markets Sovereign Analyst, T. Rowe Price
He is more positive on Thailand’s near neighbour Vietnam, however. The country managed to control the pandemic early on, which not only led to booming exports but also made it a favoured destination for companies moving operations out of China.
According to Chris, Vietnam offers a welcoming environment for foreign investment. ‘They’ve figured out the formula for attracting manufacturing that some of the other South-East Asian countries, like Indonesia, have struggled to do.
This polarisation in Asian economies and the divergent nature of economic opening has had an impact on valuations, something T. Rowe Price’s Asset Allocation Committee is acutely aware of. Only recently, the committee moved overweight value versus growth for the first time in a decade on the back of the global vaccine roll-out.
While Thomas Poullaouec, Head of Multi-Asset Solutions for Asia Pacific, pointed out that countries like Hong Kong and Singapore are benefiting from the reopening trade, he also warned that investors need to be aware of costly recovery plays: ‘You have places like India, who remain in a difficult position but are expected to recover in the second half of the year, which are becoming more expensive even though a rebound in earnings have yet to come through.’
The opening up of economies has benefited value as a style, and that has been particularly evident in the Asia ex-Japan region, with industrials, materials and financials doing well.
‘These are three sectors which are heavily represented in value strategies,’ Thomas said. ‘Year-to-date, Taiwan is still okay in terms of valuation but if you want to play the technology rebound, I would favour South Korea.’
Making valuation calls in countries that are still lagging, however, is another story. Places like the Philippines and Indonesia have a hard time delivering good performances, which makes it harder to find promising opportunities.
Countries like Thailand or Malaysia, on the other hand, could be good longer-term plays. Thomas believes Malaysia could recover later in 2022 when earnings start to tick higher.
‘It might be time to reconsider the allocation to these countries,’ he said. ‘For now, though, we continue on the same trend that we have seen year-to-date: favouring North Asia but progressively rotating into southern sectors and countries where we find more attractive valuations.’
The rise and rise of the RMB
The Chinese renminbi has enjoyed a rally that has taken it to a three-year high, which emerging markets sovereign analyst Chris Kushlis not only believes is justified but has further to go.
Strong capital inflows into China coupled with rising interest rates and an economic recovery that is running ahead of developed markets mean that the currency has appreciated strongly over the last year. Authorities in China have already provided more channels for Chinese investors to allocate money globally.
‘It’s a perfectly natural thing to do and they’re starting to try and promote the renminbi as an international currency,’ Chris said.
He believes one of the key factors going forward will be whether developed market interest rates start to normalise and slow some of the capital inflow into the Chinese market.
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