Although a number of questions still remain over the vaccine, a successful roll-out could bring significant economic relief to many Asian economies. But the impact looks to be uneven.
How does Asia stand to benefit from a vaccine?
News of a potential vaccine—from Pfizer/BioNTech—sent shockwaves across markets last week. Word of its success in a late stage trial came earlier than most expected and were more effective than even the most optimistic assumptions. In markets, the prospect of earlier than expected economic normalization sent cyclical sectors, such as transportation and tourism, higher. Coupled with more clarity on the U.S. election outcome, investor assets flowed into Asian markets.
Although a number of questions still remain over the vaccine, a successful roll-out could bring significant economic relief to many Asian economies. But the impact looks to be uneven. The countries that have suffered the most—either due to the structure of their economies or a lack of effective containment measures - stand to see more upside. By contrast, those that contained the pandemic more effectively have already returned (or are close) to pre-COVID levels of output. These economies stand to see less upside from a vaccine solution.
The economic and market impact of the pandemic has been highly uneven.
Mirroring the “stay-at-home” tech outperformance versus cyclicals in global equity markets, parts of Asia have outperformed while other parts have lagged—and largely for similar reasons. Three trends have driven this bifurcation:
1. First and foremost, quick effective containment of the virus has been a key differentiator between Asian economies. Northeast Asia – Korea, China, and Taiwan—contained COVID-19 either quickly or through less restrictive measures, allowing these economies to recover more rapidly than those in South or Southeast Asia.
2. Second, the composition of economies has been a key factor in how they have (or have not) recovered. Those economies with a larger share of services versus manufacturing have been disproportionately hit. Tourism-focused economies and economies like India with a smaller share of goods manufacturing have underperformed.
This has provided a significant boost to China, Korea, and Taiwan, which manufacture the majority of the world’s supply of electronics and semiconductors. This trend allowed these economies to recover rapidly and surpass pre-COVID levels earlier than the rest of the world. A partial reversal of this trend towards increased spending on autos as well as commodities from improved global activity could boost the outlook for ASEAN countries like Indonesia, as well as Japan, where autos are a key sector.
What does it mean for investors?
Just as global investors have reacted to the vaccine news by refocusing on hard-hit cyclical and value areas of the market, a vaccine could bring a disproportionately positive impact to the parts of Asia that have lagged, primarily South and Southeast Asian economies, and also Japan. By sheer fact that economic activity in those areas is still far from pre-COVID levels, the upside from a vaccine in these economies is greater than those with already more thorough containment. But it’s not just alleviation of the virus—many of these same countries have a large services sector that has been severely impacted by lockdowns. For example, services account for 50% of India’s GDP, and tourism accounts for 11% of Thailand’s GDP1. Even if these countries had fully contained the outbreak, the impact from a shuttered tourism sector and substitution away from services would still have likely caused a severe impact. Global distribution of a vaccine could allow a more thorough recovery in tourism and services. And, given the size of these sectors in Southeast Asia and India, the upside from a vaccine appears larger in those regions.
China and the rest of Northeast Asia have dramatically outperformed during the past few months, thanks to more effective pandemic control and an economic structure that benefitted from pandemic consumer trends. Thus, a vaccine could provide a bigger boost to the laggards in Asia, including markets in ASEAN, India, and Japan. In particular, tourism-focused economies, such as Thailand, Hong Kong, Singapore, and Malaysia are poised to benefit from a normalization of international travel. The currencies and equity markets of these economies could gain support in the coming months. To the extent a vaccine boosts the global cycle, Japan could benefit from its gearing to global growth as well as the fact that it is a relatively under-owned market.
From a sector perspective, we are witnessing a robust rotation to value and cyclical sectors across global markets. We expect this trend to continue benefitting parts of Asia that have lagged, as more positive news around vaccines and treatments comes out. Growth stocks could face headwinds in the short term, but we continue to believe in megatrends such as digital transformation, which would enable tech and semiconductor leaders in China, Korea and Taiwan to deliver above-average growth over the longer-term.
1 Data source: World Bank, as of December 31, 2019.
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