Overview
The MSCI EM Asia index has recovered nearly 85 per cent of its loss since its low in late March, but much of this is due to the performance of Chinese, Taiwanese and Korean stocks that dominate the index. Look closer and most other countries’ markets still show double-digit losses for the year.
Asia has generally dealt with the global health crisis better than other regions, but the picture across countries is far from uniform. The case numbers of Covid-19 are high and rising in India, Indonesia, Pakistan and Bangladesh. Nevertheless, the governments of those countries are refraining from further lock-downs to avoid further damage to economic growth. The near-term outlook does not look good for emerging Asia, but social mobility is improving, and this may matter more for investors.
Importantly, the emerging economies have less room for expanding fiscal support, which leaves them vulnerable to external risks such as a rise in the oil price and/or US dollar. India appears to be the most fragile. It has had to step up spending at a time when the government’s fiscal deficit was already increasing and debt-to-GDP is among the highest in the region. As an oil importer, it would also be hit by a higher oil price.
On the other hand, in Singapore, the spread of Covid-19 appears to be under control, social mobility is increasing, and the government has committed to a large support package worth 19 per cent of GDP in spending, tax cuts and loan guarantees - one of the largest in the region. Meanwhile, its stock market has lagged the best performers, creating some relative value.
For investors who can get comfortable with the country’s banks and property market, Singapore can offer a better balance of risk and reward, in our view, than the Asian emerging markets. That is, until the US dollar establishes a firmer downward trend, which could be the real catalyst for adding risk to the laggards.
