With 2021 expected to be a year of recovery, opportunities in the Asian market abound.
By Bernie Yeo
There has not been a more dramatic rollercoaster ride for investors than the year 2020. From the global outbreak of the Covid-19 pandemic to subsequent economic lockdowns and geopolitical tensions, it has been a year that many investors would probably like to forget.
A highly volatile year for financial markets, the year started off with cautious optimism as the global trade war between the United States and China began to thaw. Come February, global markets were hitting new highs.
And then came the Covid-19 pandemic, which caused markets to sell-off by 34% (as measured by the MSCI World Index) within a short span of just six weeks.
“However, as quickly as the market sold down, the recovery was swift. In early April, we saw benchmark gauges retracing back their losses induced by the pandemic as stimulus optimism buoyed market gains,” Affin Hwang Asset Management deputy managing director and chief investment officer David Ng tells Smart Investor.
Policymakers were seen doing whatever it takes to shelter the economy through a swathe of stimulus measures ranging from relief packages to loan facilities and asset purchases.
“All the losses were finally recovered at the beginning of November, which coincided with the initial release of Phase III clinical trial data for the vaccines. So, there is light at the end of the tunnel in every cycle,” he adds.
Opportunities for Asian markets
There is an emerging bullish consensus that 2021 will be a recovery year. While current estimates suggest that global gross domestic product (GDP) is expected to fall by around 5% in 2020, this is expected to rebound by 5.4% in 2021 as growth returns and more economies open up.
“So far, economic growth has surprised on the upside and there are positive revisions to corporate earnings. These will be supportive of risk assets. Effective vaccines will be key in providing a boost for markets,” Ng remarks.
However, as the vaccines will take time to produce, the recovery will be prolonged into 2022 and 2023, thus making this a multi-year theme.
Being a recovery year, the expected key investment themes are normalisation/rebound plays that include banks, insurers, materials, consumer discretionary and tourism and hospitality.
“Stocks that were trading at low multiples are now coming back in flavour as we see a rotation to value,” says Ng.
However, he stresses that the shift in value does not signal the end of the upside for technology and growth stocks. After all, while valuations are expensive, it is also one of the sectors that has the ability to grow profits consistently and exhibit secular growth, and not many sectors can claim as much.
According to Ng, Affin Hwang Asset Management is adopting a barbell approach for their portfolio positioning.
“On one end, we are tilted towards a basket of secular growth names with multi-year prospects that would continue to grow beyond the development of the vaccine. On the other end, we are also weighted towards cyclical and value-plays that would benefit from a re-opening of the economy,” he says.
On the flipside, there are also risks that could derail this recovery theme.
“Firstly, we would be closely monitoring president-elect Joe Biden’s approach to dealing with China. Asian markets and Asian foreign exchanges have reacted positively to the recent election results. An antagonistic approach would certainly bring downside risks,” Ng explains.
Another key risk the team is monitoring is whether corporate earnings can recover as strongly as expected given the rising Covid-19 cases globally. Market valuations are high and good earnings are thus required to anchor them.
As it will take time to produce enough vaccines on a global scale, Ng also expects the economic conditions in the near term to stay muted. “Growth may stay tepid until various countries and/or sectors can fully reboot,” he says.
Investing in the new normal
But while 2020 may be a year that investors would like to forget, it was also one filled with important lessons.
“If anything, the year has emphasised yet again the importance of diversification. Staying diversified across different asset classes is crucial; geographical and sector exposure can help minimise volatility and smoothen returns. In turn, this will induce investors to remain invested and help them stay the course,” Ng opines.
2020 has also underscored the perils of market timing and investing according to one’s emotions. When the markets plunged in March, for instance, many investors may have panicked and resorted to shifting all their allocations to cash.
According to Ng, the market began to recover and recouped back its losses a few weeks after the drop, and not wanting to miss out on the surge, many investors have shifted back their exposure into equities.
“Timing the markets can prove to be more costly than the actual correction itself. That being said, investors should periodically reassess their risk capacity to see if they are comfortable with the level of risk in their portfolio.
“If investors are taking on more risk than they can handle, this might cause jitters and lead to making impulsive decisions that do not benefit them,” concludes Ng.