• Asia’s economic recovery has lagged developed markets since the start of the year, but now has more room for growth
  • Valuations attractive relative to developed markets in a later stage of recovery
  • Pandemic has accelerated structural trends in Asia such as online transacting and fintech

It is misguided to believe that all countries are emerging from the pandemic in the same way. In reality, the trajectory of recovery is different across different regions. Asian markets have lagged developed markets since the start of the year, as a regulatory clampdown in China hit sentiment and the Delta variant slowed economic momentum. However, it also means the best of Asia’s recovery may still lie ahead.

The spread of the Delta variant across the region has forced many economies to stay closed or partially closed for longer. It delayed the recovery that is now entrenched in Western markets, but leaves Asian economies with greater room for recovery at the same time as momentum in other economies begins to fade.

A slower pace of recovery has also enabled the region to avoid other problems now facing the rest of the world. For example, it has helped to keep inflation in check. Equally, Asian policymakers have demonstrated greater fiscal prudence than elsewhere, so the region’s recovery is not saddled with the debt overhang of Western markets.

Prospects for Asian markets look relatively buoyant as a result. Nick Yeo, manager of abrdn China Investment Company, points out that China is in a different business cycle to developed markets. “It has already moved to a neutral monetary stance. With some weakening in the economy, monetary policy could be eased towards the end of the year. This is a notable contrast to developed markets.” Elsewhere in Asia, policymakers still have monetary and fiscal firepower to counter any resurgence of the virus.

Compelling valuations

The relative weakness of Asian markets since the start of the year has also helped the region to avoid the high valuations seen across many developed markets, leaving more opportunities for investors. James Thom, manager of the Aberdeen New Dawn Investment Trust, says Asia is looking attractively valued relative to its long-term history. However, he says there is considerable nuance by country and sector. “India has significantly outperformed the rest of Asia and valuations are looking a little stretched. A lot of technology IPOs have come to market at quite rich valuations, but ASEAN markets are looking cheap and we see a lot of value.”

Yeo says of the Chinese market: “It is definitely cheaper than a year ago. The silver lining of market weakness following the Chinese Communist Party’s regulatory changes is that valuations have come down. Today, they are near their 10-year average. For context, they are around 50% cheaper than the S&P 500 on a price-to-book basis and 35% cheaper on a price-to-earnings basis. Internet companies are trading 30-40% cheaper than the FANGs (Facebook, Amazon, Netflix and Google) in the US.”

Earnings growth is emerging at pace. Yoojeong Oh, manager of the Aberdeen Asian Income Fund, says that earnings and dividends have been recovering, particularly among higher-quality companies: “The earnings recovery has been a good story. Across higher-quality companies, demand has been resilient despite Covid and a lot of companies have adapted to this new normal. They’ve been able to fight off inflation risks by cutting their costs. The recovery in earnings and cash flows has helped dividends, which are now comparable to 2019 levels.”

Structural trends accelerating

As with elsewhere, the pandemic has created and accelerated a number of structural trends. Thom says that the shift to transacting online has accelerated as fast in Asia as elsewhere: “Bricks and mortar banks are seeing an acceleration in disruption to payments and services because of new fintech competitors.” Equally, working from home is a significant trend, with implications for the property market.

There are also subtler changes. “Covid structurally changed the outlook for passenger cars in India with a drop-off in the use of motorbikes,” he says. “People have become permanently cautious around hygiene and health. There is also a huge amount of innovation in the healthcare sector. We have seen companies move to digital processes, helping them to become leaner.”

The China conundrum

The biggest variable for the prevailing strength of Asia is China. The region is increasingly intertwined and dependent on its largest economy. Many banks and property companies have business interests in China, and supply chains across the region are interlinked. The government’s public crackdown on sectors including the internet, plus the repercussions from the Evergrande saga, have worried investors. But Yeo sees this as a sign that policymakers are willing to take tough decisions to support growth.

“The government embarked on a policy of deleveraging before the pandemic. This was put on hold when Covid-19 hit, but has now resumed. The Evergrande saga is a sign that the government wants to tackle high leverage in the system. It is also addressing the question of moral hazard. China is striving for sustainable, long-term growth. Investors shouldn’t misread the regulatory tightening as the end of capitalism nor allowing companies to make profits.”

Thom says that Asia remains home to some of the best companies in the world, businesses are getting stronger. With the region’s recovery in its early stages and valuations attractive relative to elsewhere, Asia has plenty to tempt investors.

Important information

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Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments. 

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