We expect continued divergence across Asian economies, particularly between North and South Asia.
A worsening Covid outbreak across many parts of Asia is sparking renewed concerns on the growth outlook. The spread of the “delta” variant, combined with Asia’s low-tolerance ”zero Covid” approach, has led to significantly tighter restrictions in most countries.
In much of Southeast Asia, the delta wave has been the largest yet, with Malaysia, Thailand, and Vietnam reporting record new case levels.
But even in economies with relatively fewer infections such as Australia and South Korea, restrictions have tightened materially.
This comes on the heels of Q2 GDP data which was underwhelming for northeast Asia, with Korea, Taiwan, and Hong Kong all reporting deceleration, and the latter two a quarter-on-quarter contraction.
What does this mean for the recovery? First, we expect continued divergence between North and South Asia. The combination of large exporting sectors and advanced public health capabilities allow NE Asian economies to maintain economic activities amidst tighter restrictions.
Korea is a good example of “COVID adaptiveness” – the country has been in local lockdowns since early July, however the drag on economic activity has been relatively benign – service activity only slightly moderated, exports in July as well as the beginning of August remained strong.
By contrast, July manufacturing PMIs in Thailand, Vietnam, Indonesia and Malaysia fell sharply due to renewed lockdowns.
Second, China’s containment of the current outbreak will be key to watch. This current wave represents one of the most serious waves since the pandemic first broke out in early 2020. That said, the situation is being dealt with quite swiftly and daily new cases are falling rapidly – to 6 local cases on 16th August.
We think China can contain this wave, but will inevitably come with a degree of economic cost in the near term – although once this wave abates there is room for some activity normalisation later in the year.
Additionally there are other factors weighing on growth at the moment such as property developer deleveraging, regulatory uncertainty, and continued supply chain disruptions.
Taken together we are nudging down our growth forecast for 2021 to 8.5%, from 8.8% previously.
Looking ahead, vaccine progress will be the key differentiator. The good news is that the pace of vaccination has picked up across the region, though it remains decidedly slower in south and southeast Asia than elsewhere.
The bad news is that the more infectious delta variant implies a higher bar for “herd immunity”—likely 85% or above. In most economies, policymakers will likely stay on guard well into the first half of next year.
From an investment perspective, this leads us to be highly selective and favor active management when investing in the region:
We are positive on Taiwan and Korea for leadership in semiconductor production, COVID-19 response and accelerating vaccine rollout.
Selective in China amidst slowing growth and regulatory uncertainty.
We prefer Chinese Government Bonds, onshore A-shares which include policy beneficiaries and select high-quality tech names.
We are selective in Japan and prefer beneficiaries of strong global manufacturing demand,and structural megatrends in factory automation and technology.
Lastly, we are cautious on Southeast Asian economies still struggling with outbreaks amidst low vaccination rates. A worsening Covid outbreak across many parts of Asia is sparking renewed concerns on the growth outlook. The spread of the “delta” variant, combined with Asia’s low-tolerance ”zero Covid” approach, has led to significantly tighter restrictions in most countries.
In much of Southeast Asia, the delta wave has been the largest yet, with Malaysia, Thailand, and Vietnam reporting record new case levels.
But even in economies with relatively fewer infections such as Australia and South Korea, restrictions have tightened materially.
This comes on the heels of Q2 GDP data which was underwhelming for northeast Asia, with Korea, Taiwan, and Hong Kong all reporting deceleration, and the latter two a quarter-on-quarter contraction.
What does this mean for the recovery? First, we expect continued divergence between North and South Asia. The combination of large exporting sectors and advanced public health capabilities allow NE Asian economies to maintain economic activities amidst tighter restrictions.
Korea is a good example of “COVID adaptiveness” – the country has been in local lockdowns since early July, however the drag on economic activity has been relatively benign – service activity only slightly moderated, exports in July as well as the beginning of August remained strong.
By contrast, July manufacturing PMIs in Thailand, Vietnam, Indonesia and Malaysia fell sharply due to renewed lockdowns.
Second, China’s containment of the current outbreak will be key to watch. This current wave represents one of the most serious waves since the pandemic first broke out in early 2020. That said, the situation is being dealt with quite swiftly and daily new cases are falling rapidly – to 6 local cases on 16th August.
We think China can contain this wave, but will inevitably come with a degree of economic cost in the near term – although once this wave abates there is room for some activity normalisation later in the year.
Additionally there are other factors weighing on growth at the moment such as property developer deleveraging, regulatory uncertainty, and continued supply chain disruptions.
Taken together we are nudging down our growth forecast for 2021 to 8.5%, from 8.8% previously.
Looking ahead, vaccine progress will be the key differentiator. The good news is that the pace of vaccination has picked up across the region, though it remains decidedly slower in south and southeast Asia than elsewhere.
The bad news is that the more infectious delta variant implies a higher bar for “herd immunity”—likely 85% or above. In most economies, policymakers will likely stay on guard well into the first half of next year.
From an investment perspective, this leads us to be highly selective and favor active management when investing in the region:
We are positive on Taiwan and Korea for leadership in semiconductor production, COVID-19 response and accelerating vaccine rollout.
Selective in China amidst slowing growth and regulatory uncertainty.
We prefer Chinese Government Bonds, onshore A-shares which include policy beneficiaries and select high-quality tech names.
We are selective in Japan and prefer beneficiaries of strong global manufacturing demand,and structural megatrends in factory automation and technology.
Lastly, we are cautious on Southeast Asian economies still struggling with outbreaks amidst low vaccination rates.
In much of Southeast Asia, the delta wave has been the largest yet, with Malaysia, Thailand, and Vietnam reporting record new case levels.
But even in economies with relatively fewer infections such as Australia and South Korea, restrictions have tightened materially.
This comes on the heels of Q2 GDP data which was underwhelming for northeast Asia, with Korea, Taiwan, and Hong Kong all reporting deceleration, and the latter two a quarter-on-quarter contraction.
What does this mean for the recovery? First, we expect continued divergence between North and South Asia. The combination of large exporting sectors and advanced public health capabilities allow NE Asian economies to maintain economic activities amidst tighter restrictions.
Korea is a good example of “COVID adaptiveness” – the country has been in local lockdowns since early July, however the drag on economic activity has been relatively benign – service activity only slightly moderated, exports in July as well as the beginning of August remained strong.
By contrast, July manufacturing PMIs in Thailand, Vietnam, Indonesia and Malaysia fell sharply due to renewed lockdowns.
Second, China’s containment of the current outbreak will be key to watch. This current wave represents one of the most serious waves since the pandemic first broke out in early 2020. That said, the situation is being dealt with quite swiftly and daily new cases are falling rapidly – to 6 local cases on 16th August.
We think China can contain this wave, but will inevitably come with a degree of economic cost in the near term – although once this wave abates there is room for some activity normalisation later in the year.
Additionally there are other factors weighing on growth at the moment such as property developer deleveraging, regulatory uncertainty, and continued supply chain disruptions.
Taken together we are nudging down our growth forecast for 2021 to 8.5%, from 8.8% previously.
Looking ahead, vaccine progress will be the key differentiator. The good news is that the pace of vaccination has picked up across the region, though it remains decidedly slower in south and southeast Asia than elsewhere.
The bad news is that the more infectious delta variant implies a higher bar for “herd immunity”—likely 85% or above. In most economies, policymakers will likely stay on guard well into the first half of next year.
From an investment perspective, this leads us to be highly selective and favor active management when investing in the region:
We are positive on Taiwan and Korea for leadership in semiconductor production, COVID-19 response and accelerating vaccine rollout.
Selective in China amidst slowing growth and regulatory uncertainty.
We prefer Chinese Government Bonds, onshore A-shares which include policy beneficiaries and select high-quality tech names.
We are selective in Japan and prefer beneficiaries of strong global manufacturing demand,and structural megatrends in factory automation and technology.
Lastly, we are cautious on Southeast Asian economies still struggling with outbreaks amidst low vaccination rates. A worsening Covid outbreak across many parts of Asia is sparking renewed concerns on the growth outlook. The spread of the “delta” variant, combined with Asia’s low-tolerance ”zero Covid” approach, has led to significantly tighter restrictions in most countries.
In much of Southeast Asia, the delta wave has been the largest yet, with Malaysia, Thailand, and Vietnam reporting record new case levels.
But even in economies with relatively fewer infections such as Australia and South Korea, restrictions have tightened materially.
This comes on the heels of Q2 GDP data which was underwhelming for northeast Asia, with Korea, Taiwan, and Hong Kong all reporting deceleration, and the latter two a quarter-on-quarter contraction.
What does this mean for the recovery? First, we expect continued divergence between North and South Asia. The combination of large exporting sectors and advanced public health capabilities allow NE Asian economies to maintain economic activities amidst tighter restrictions.
Korea is a good example of “COVID adaptiveness” – the country has been in local lockdowns since early July, however the drag on economic activity has been relatively benign – service activity only slightly moderated, exports in July as well as the beginning of August remained strong.
By contrast, July manufacturing PMIs in Thailand, Vietnam, Indonesia and Malaysia fell sharply due to renewed lockdowns.
Second, China’s containment of the current outbreak will be key to watch. This current wave represents one of the most serious waves since the pandemic first broke out in early 2020. That said, the situation is being dealt with quite swiftly and daily new cases are falling rapidly – to 6 local cases on 16th August.
We think China can contain this wave, but will inevitably come with a degree of economic cost in the near term – although once this wave abates there is room for some activity normalisation later in the year.
Additionally there are other factors weighing on growth at the moment such as property developer deleveraging, regulatory uncertainty, and continued supply chain disruptions.
Taken together we are nudging down our growth forecast for 2021 to 8.5%, from 8.8% previously.
Looking ahead, vaccine progress will be the key differentiator. The good news is that the pace of vaccination has picked up across the region, though it remains decidedly slower in south and southeast Asia than elsewhere.
The bad news is that the more infectious delta variant implies a higher bar for “herd immunity”—likely 85% or above. In most economies, policymakers will likely stay on guard well into the first half of next year.
From an investment perspective, this leads us to be highly selective and favor active management when investing in the region:
We are positive on Taiwan and Korea for leadership in semiconductor production, COVID-19 response and accelerating vaccine rollout.
Selective in China amidst slowing growth and regulatory uncertainty.
We prefer Chinese Government Bonds, onshore A-shares which include policy beneficiaries and select high-quality tech names.
We are selective in Japan and prefer beneficiaries of strong global manufacturing demand,and structural megatrends in factory automation and technology.
Lastly, we are cautious on Southeast Asian economies still struggling with outbreaks amidst low vaccination rates.
Authors:
Alex Wolf, Head of Investment Strategy for Asia
Julia Wang, Global Market Strategist
Yuxuan Tang, Global Market Strategist
Weiheng Chen, Global Market Strategist
A worsening Covid outbreak across many parts of Asia is sparking renewed concerns on the growth outlook. The spread of the “Delta” variant, combined with Asia’s low-tolerance “zero Covid” approach, has led to significantly tighter restrictions in most countries. In much of Southeast Asia, the Delta wave has been the biggest yet, with Malaysia, Thailand, and Vietnam reporting record new case levels. But even in economies with relatively fewer infections such as Australia and South Korea, restrictions have tightened materially. This comes on the heels of Q2 GDP data that was underwhelming for Northeast Asia, with South Korea, Taiwan, and Hong Kong all reporting deceleration, with the latter two seeing a quarter-on-quarter contraction.
What does this mean for the recovery?
We expect continued divergence across Asian economies, particularly between North and South Asia. While the Delta variant-induced resurgence in cases is an Asia-wide issue, the impact on economic activity has varied across countries. The impact felt by Northeast Asian economies has been relatively modest so far. South Korea is a good example of “Covid adaptiveness” – the country has been in local lockdowns since early July, however the drag on economic activity has been relatively benign. Service activity only slightly moderated, and exports in July and early August remained strong. In Japan, economic activity has stayed resilient thanks to strong consumer sentiment during the Olympics and relatively permissive virus policies.
In contrast, many Southeast Asian economies are faced with large disruptions. As shown in the chart below, July manufacturing PMIs in Thailand, Vietnam, Indonesia and Malaysia fell sharply due to renewed lockdowns.
It is notable that apart from a few “zero tolerance” strategy practitioners (Mainland China, Hong Kong, New Zealand), in countries with higher vaccination rates and/or more advanced mitigation measures, economic restrictions are becoming more anchored by hospitalization and mortality rates instead of new infections. As a result, we expect the recovery path of Asian economies to continue diverging in line with vaccination progress. Economies with a majority of their population vaccinated could relax restrictions and begin moving to relax border controls. Singapore has officially kicked off preparation to commence a four-stage reopening plan. Japan’s vaccination pace keeps accelerating, which could lead to a lifting of emergency measures currently in place, allowing a rebound in Q4. While South Korea will likely keep a certain level of restrictions in place for some time, we don’t expect infections to significantly escalate from here, and growth should largely remain on track.
On the other hand, we expect rising infections to cause significant headwinds in some economies, particularly those with vulnerable health systems and low vaccination rates, namely Thailand, Indonesia, the Philippines, and Vietnam. With vaccination rates at the 10-20% level, these economies are relatively more vulnerable to this highly infectious mutation, and governments will likely be forced to keep strict mobility restrictions in place in order to avoid overwhelming the healthcare system. Within this group, Vietnam’s growth struggle may last longer, as vaccines secured by the government thus far can only cover roughly 50% of the population.1 Vietnam has performed well due to its powerful export sector, and the ability to keep factories open amid rising infections will be the key factor to watch. Structurally, Thailand could be in the worst position as an international tourism center, as the mutation is set to significantly push back border reopening in the region.
Looking ahead, vaccine progress will be the key differentiator. The good news is that the pace of vaccination has picked up across the region, though it remains decidedly slower in Southeast Asia than elsewhere. The bad news is that the more infectious Delta variant implies a higher bar for “herd immunity”—likely 85% vaccinated or above. In most economies, policymakers will likely stay on guard well into the first half of next year.
Focus on China
Over the last few weeks, several cities in China have seen local outbreaks of COVID-19, mostly of the Delta variant. This latest outbreak follows a breach at Nanjing airport. China has always had imported cases, but zero domestic infections (or low single digits) for a long stretch of time. This current outbreak represents one of the most serious waves since the pandemic first broke out in early 2020, and has so far spread to 29 cities. That said, the situation is being dealt with quite swiftly, and daily new cases are falling rapidly – to six local cases on 16th August. We think China can contain this wave, but it will likely take a few more weeks to get the number back down to zero.
This outbreak will inevitably come with a degree of economic cost, but not an excessively large amount, in our view. While China continues to have a "zero Covid" goal, its Covid strategy has actually evolved quite a bit over the past one and half years. Instead of widespread shutdowns, the authorities now use a fairly sophisticated and comprehensive tracking, tracing, and testing system that allows them to confine restrictions to a smaller area, and minimize unnecessary economic disruption. Indeed, the July activity data suggests that the impact on consumer spending is negative, but only modestly so. We expect the August reading to be similarly weak, but from there onwards consumer spending should have room to normalize. Given the pandemic isn’t over, consumers likely won’t return to pre-COVID types of spending behavior anytime soon, but a modest recovery is still likely.
Compared with the outbreak earlier in the year, other factors are weighing on growth right now. One is the deleveraging of property developers (which began in earnest after the “three red lines” policies last year). As the market consolidates, we expect overall housing investment growth to slow in 2H 2021. The other headwind is global supply chain disruptions (particularly semiconductor shortages), which have weighed on industrial production (particularly autos) in July. This should ease somewhat by year-end but could weigh on growth in the interim. Lastly, it is still unclear how recent regulatory shifts will impact the macro backdrop. Considering the Delta impact on consumption recovery, housing market moderation, supply chain disruptions, and potential negative business sentiment effects from recent regulations, we think Q4 growth could dip below 5% y-o-y (before recovering in Q4 and more in 2022). We are nudging down our 2021 growth to 8.5%, from 8.8% previously.
On a more positive note, given that developed market growth is still relatively robust and emerging market exports are generally more constrained due to Delta, the export side of the economy will likely continue to do fine. Manufacturing investment is also still gradually improving. Furthermore, the silver lining of the situation is that Chinese policymakers are becoming more aware of the downside risks to growth. Recent policy meetings have signaled a clear end to monetary policy tightening and further easing in the coming months. We think both monetary easing (RRR, policy rate) and fiscal support are likely. This policy shift should help to put a floor on growth in 2H 2021.
Asia as the world’s (faltering) growth engine
What are the global implications of Asia’s rising infections and some economies’ steadfast commitment to “zero Covid”? There are three short-term issues to consider. First, Covid cases and resulting lockdowns are causing supply chain issues, particularly at a time when they are already stretched. Terminals at China’s Ningbo port (the world’s third busiest port) closed as a result of a positive case, halting operations until further notice. This will likely affect August exports and exacerbate problems with the global logistics bottleneck – thus pushing freight rates even higher. This closure creates a domino effect forcing ships to bypass Ningbo, creating increased congestion at other regional ports. According to Bloomberg, the backlog of anchored ships at Chinese ports in Shanghai and Ningbo is now double the number of the past five months.
Elsewhere, rising cases could begin to impact production. Increased economic restrictions in key manufacturing hubs such as Vietnam could have knock-on effects on the global supply of electronic goods.
Second, economic restrictions are resulting in weaker growth, which negatively impacts import demand. Imports across the region dropped sharply in July, with imports from DM down nearly 5% in month-on-month terms from June. Furthermore, with the low vaccination rate across the region and the apparent infectiousness of the Delta variant, future outbreaks are impossible to rule out. This means that countries intent on pursuing “zero Covid” policies could face repeated rounds of containment measures, exerting a continuing drag on domestic demand in the coming months.
Lastly, the prospect of a travel recovery across the region is now quite remote. Rising cases are prompting renewed border restrictions and the combination of a) a steadfast pursuit of “zero Covid”, b) the infectiousness of the Delta variant and c) low vaccination rates, are clearly pushing back any possibility of international travel. There are both push and pull factors at play. Rising cases across the region reduce any incentive to travel, even if borders were to remain open. China is the largest source of tourists across the region, and there is a likelihood that their border restrictions will remain in place for some time.
What does it all mean for investors?
There are clear divergences across Asia in terms of the virus response, reopening progress and economic recovery. This leads us to be highly selective and favor active management when investing in the region:
- Constructive on Taiwan and South Korea for leadership in semiconductor production, Covid responses and vaccine rollout.
- Selective in China amidst slowing growth and regulatory action. Prefer CGBs and onshore A-shares, which include longer-term policy beneficiaries and select high-quality tech names.
- Selective in Japan and prefer beneficiaries of strong global manufacturing demand and structural megatrends in factory automation and technology.
- Cautious on Southeast Asian economies still struggling with outbreaks and low vaccination rates.
Footnotes:
1 Duke University Health Innovation Center, data is as of August 13, 2021.
All market and economic data as of August 19, 2021 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
There can be no assurance that any or all of these professionals will remain with the firm or that past performance or success of any such professional serves as an indicator of the portfolio’s success.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
Although third-party information has been obtained from sources believed to be reliable, JPMorgan Chase & Co. and its affiliates do not guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.
By visiting a third-party site, you may be entering an unsecured website. J.P. Morgan is not responsible for, and does not control, endorse or guarantee, any aspect of any linked third-party site. J.P. Morgan accepts no direct or consequential losses arising from the use of such sites.
Structured products involve derivatives. Do not invest in these products unless you fully understand and are willing to assume the associated risks. The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with each individual structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss. The risks listed above are not complete. For a more comprehensive list of the risks involved with this particular product, please speak to your J.P. Morgan team. If you are in any doubt about the risks involved in the product, you may clarify with the intermediary or seek independent professional advice.
In discussion of options and other strategies, results and risks are based solely on hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether option or option-related products in general, as well as the products or strategies discussed herein are suitable to their needs. In actual transactions, the client’s counterparty for OTC derivatives applications is JPMorgan Chase Bank, N.A. and its affiliates. For a copy of the “Characteristics and Risks of Standardized Options” booklet, please contact your J.P. Morgan team.
This document may also have been made available in a different language, at the recipient’s request, and for convenience only. Notwithstanding the provision of a convenience copy, the recipient re-confirms that he/she/they are fully conversant and has full comprehension of the English language. In the event of any inconsistency between such English language original and the translation, including without limitation in relation to the construction, meaning or interpretation thereof, the English language original shall prevail.
RISK CONSIDERATIONS
• Past performance is not indicative of future results. You may not invest directly in an index.
• The prices and rates of return are indicative as they may vary over time based on market conditions.
• Additional risk considerations exist for all strategies.
• The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
