In brief

• The responses to and effects of the pandemic have varied across Asia. Given the differing degrees in extent of lockdowns and rescue packages rolled out, an analysis of Northeast and Southeast Asia seems to be a suitable way to evaluate the recovery prospects in 2021.
• China was the first economy to recover since the lows in March and now experiences a sense of normalcy, while other Northeast Asian economies have benefitted due to a strong tech demand.
• Southeast Asian economies have lagged their Northeast Asian counterparts this year, but are poised for a robust recovery in 2021, on the back of recovery in exports and tourism, as well as cheaper valuations and strong earnings forecasts.
• Long-term structural growth trends remain and have perhaps been accelerated. Multilateral trade agreements, technological growth and infrastructure development will drive supply chain diversification and bode well for the broader Asia region going forward. 

A vaccine is on all our Christmas lists

The COVID-19 pandemic has ravaged the global economy in 2020 and will likely also play a part in the economic story going into next year. China was the first economy to be affected, but it managed to enforce lockdowns quickly and efficiently. As a result, it has seen a strong and relatively swift recovery in the second and third quarters of the year and is now experiencing a return to normalcy.

Other economies in Asia, particularly in Northeast Asia, defined in this bulletin as China, Japan, Hong Kong, South Korea and Taiwan, have also controlled the spread of the pandemic relatively well. However, as the winter months approach, infection numbers have also risen. Japan, Hong Kong and South Korea have already seen an uptick in cases, while their Southeast Asian counterparts remain relatively stable (Exhibit 1). Meanwhile, there is a significant amount of speculation surrounding the development of an effective vaccine in the near term. 

EXHIBIT 1: DAILY INCREASE IN CASES IN ASIA
7-DAY MOVING AVERAGE, PER MILLION PEOPLE

Source: Johns Hopkins University, World Bank – World Development Indicators, J.P. Morgan Asset Management. Population numbers are based on World Bank data as of 31/12/19.
Data reflect most recently available as of 07/12/20.

A vaccine will not result in an immediate end to the virus shock, but it certainly pushes us in a more optimistic direction. A shift back towards normality will help all economies and those which have seen less disruption will better placed to take advantage of the recovery.

China reviving Asian trade

When it comes to trade, Northeast Asia has also outperformed Southeast Asia, namely Association of Southeast Asian Nations (ASEAN) economies, this year, largely on the back of China’s robust economic recovery from the pandemic, which can be attributed to its consumption and production sectors. China’s stronger imports from the rest of Asia partly reflect the strong global demand for tech. Due to the sheer size of the Chinese market, this significant rise in tech demand has catalyzed electronic component exports from around the region. Asia’s export growth into China mostly returned to positive territory by the end of the second quarter on a year-over-year basis.

South Korea and Taiwan, largely known for their roles in the global electronics supply chain, have benefitted immensely from China’s rise in demand of technology-related products. However, in Southeast Asia, the rebound has not been as robust. While some ASEAN members, such as Malaysia, were able to reap some of the benefits of China’s electronics demand, other economies, such as Singapore and Philippines, did not enjoy the same lift. They will likely have to rely on a broader economic recovery before their trade activities can return to pre-pandemic levels (Exhibit 2).

EXHIBIT 2: GROWTH OF ASIAN EXPORTS TO CHINA
3-MONTH MOVING AVERAGE, YEAR-OVER-YEAR CHANGE

Source: CEIC, Haver, J.P. Morgan Asset Management.
*Includes Indonesia, Malaysia, Philippines, Singapore, and Thailand.
Data reflect most recently available as of 30/11/20.

Looking ahead, we could see a decline in China’s electronics import figures in 4Q 2021, especially if the recent demand was a result of China’s efforts to stockpile components prior to U.S. tech export restrictions taking effect in September. Furthermore, although food, energy and electronics are currently its top imports, China is aiming to be more self-sufficient by increasing domestic supply and improving efficient consumption in accordance with its new five-year plan. Therefore, a decline in imports is a trend we could see extend over a longer period.

Another long-term driver going forward is the shift in supply chains. The COVID-19 outbreak has shown vulnerabilities in being overly reliant on certain economies for specific goods. The U.S.-China trade tension since 2018 has also highlighted the need to diversify supply chains. China might be the largest importer of goods for various Asian economies and a major manufacturing base, but the regional trade landscape could see a gradual change over the next five years as more diversification takes place.

On another note, fifteen economies in the Asia-Pacific region have recently formalized the Regional Comprehensive Economic Partnership (RCEP), the world’s largest trade agreement. However, the immediate impact is likely to be low. The RCEP agreement will gradually remove tariffs over the next decade and beyond. This will help reinforce Asia as a key hub to world trade for the foreseeable future. 

When are the tourists coming back?

The COVID-19 pandemic has collapsed travel and tourism demand across the world. Tourism makes up a sizeable part of several Southeast Asian economies and their job markets. The World Travel & Tourism Council estimates that in Southeast Asia, the tourism sector contributed USD 234billion, or 6.6% of the region’s gross domestic product (GDP) in 2019.

To mitigate the spread of the virus, borders and businesses, including airports, hotels, restaurants, and tourist attractions, were closed.

The total collapse in tourist numbers (Exhibit 3) has meant that this region has been hit particularly hard, but an approaching vaccine means significant potential improvement in the travel and tourism sector can be harnessed to contribute to the region’s economic recovery.

EXHIBIT 3:  ASIA TOURISM ARRIVALS
MILLIONS

Source: Development of Tourism Thailand, FactSet, National Tourist Organization Japan, Statistics Singapore, Tourism Malaysia, Tourism Organization Korea, Tourist Association of Hong Kong, J.P. Morgan Asset Management.
Data reflect most recently available as of 30/11/20.

Before COVID-19, 29% of guests in hotels in Asia were domestic travellers. Ideally this number will rise significantly. We are already seeing some evidence of local tourism coming back. In China, domestic air travel has rebounded steadily, with the number of flights per month and hotel occupancy rates surpassing pre-crisis levels.

The importance of regional tourism for the recovery of Southeast Asian economies should not be underestimated. In 2018, 45.2% of ASEAN’s total number of visitors were from the region; China and the European Union had the second and third highest number of visitors to Southeast Asia with 12.4% and 8.5% of the total, respectively.

Of all the regions in the world that are familiar with dealing with a pandemic, Southeast Asia has both the experience and the track record of recovery. History is not necessarily an indicator of future success, but we know that international tourism has survived and grown over the last 20 years. Each time the industry was knocked back, growth eventually returned to an upward trajectory. 

Governments to the rescue

One of the more positive aspects of the Southeast Asia region is its relatively low debt-to-GDP ratio (Exhibit 4). The COVID-19 situation has placed more pressure on governments at a difficult time. Spending has increased in response to the need for economic rescue packages, testing fiscal discipline and budget targets.

EXHIBIT 4: TOTAL NON-FINANCIAL SECTOR DEBT BY ECONOMY
SHARE OF GDP, LAST FOUR QUARTER AVERAGE

Source: BIS, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management.
Data reflect most recently available as of 30/11/20.

Economies in Southeast Asia, such as Indonesia, tend to have lower debt levels, but they have had to find a balance between increasing spending and keeping deficits under control. In Asia, only Japan and Singapore appear to have rolled out support in excess of 10% of GDP (Exhibit 5), giving the other economies further capacity for support in case the situation does deteriorate. 

EXHIBIT 5: ESTIMATED FISCAL SUPPORT IN RESPONSE TO COVID-19
PERCENT OF GDP

Source: IMF Fiscal Monitor, J.P. Morgan Asset Management. Percent of GDP are based on June 2020 World Economic Outlook Update for 2020. Additional spending and foregone revenue refer to increases in government expenditure and reductions in tax revenue. Loans, equity and guarantees refer to additional liquidity support offered to firms and banks. Data represent key fiscal measures governments have announced in response to the COVID-19 pandemic as of 12/06/20.
Data reflect most recently available as of 30/11/20.

Things are looking up

The Asian economy, from an earnings perspective, seems poised for a solid recovery in 2021. Only China, South Korea and Taiwan have been able to see positive earnings growth this year, largely due to the performance of the technology and health care sectors. Earnings revision ratios have bottomed and are almost at the point where analysts are finally expecting more upgrades than downgrades. Even considering that initial estimates for next years earnings results tend to be overly optimistic, the expectations shown in Exhibit 6 for a recovery in activity as we come out on the other side of the pandemic shock are a good sign for equity performance.  

EXHIBIT 6: EARNINGS EXPECTATIONS
EARNINGS PER SHARE, YEAR-OVER-YEAR CHANGE, CONSENSUS ESTIMATES

Source: IBES, MSCI, J.P. Morgan Asset Management. Equity indices used are the respective MSCI indices. Consensus estimates used are calendar year estimates from IBES. Past performance is not a reliable indicator of current and future results. 
Data reflect most recently available as of 30/11/20.

Valuation wise, the ASEAN region does appear more attractive, especially on a price-to-book basis where Taiwan looks expensive. However, an important factor to keep in mind is that the MSCI AC ASEAN index is strongly weighted toward financials and the banking sector, with an estimated revenue exposure near 45%. Financials will see some difficulty in a low-rate environment and taking advantage of the recovery themes seen across economies will require careful selection to identify the best prospects. 

Investment implications

The key vulnerability to the post-COVID-19 economic recovery lies on the external front. If developed economies were to be impacted by a sizable new wave of viral infections, the external sector will be the recovery’s Achilles heel. However, most economies in Asia have managed the virus well compared to the rest of the world. China, Korea and Taiwan will have space to do more than others if things take a turn for the worse. Debt-to-GDP ratios might be high, but deficits should remain under control and fiscal support packages are not particularly oversized.

Export-oriented economies, such as Hong Kong, Singapore and Thailand, will likely depend on the recovery of their Asian neighbors, as without the cushion from large domestic demand like that seen in mainland China, they would otherwise suffer disproportionally from trade disruptions and travel restrictions. On the tourism front, while activity has been reduced essentially to zero since the emergence of the pandemic, a return to normalcy in the sector in 2021 is becoming increasingly likely with the development of effective vaccines.

Overall, we do expect the recovery to hold its pace through the winter months into 2021 and beyond. For longer-term investors, our positive outlook on the equity story across Asia still holds. New trade agreements, such as RCEP, will facilitate supply chain diversification and support positive structural growth trends, such as changes in consumption, regional infrastructure development and China’s technological growth, which remain vital and have perhaps been accelerated. However, a near-term allocation to ASEAN markets could prove beneficial as we may see them outperform those in Northeast Asia. Cheaper valuations, strong earnings expectations and vaccine optimism present further upside potential after a period of underperformance.

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