Asia Pacific Stocks Look for Rebound in Face of Omicron

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Amber Sinha, CFA

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Amber Sinha, Senior Portfolio Manager at CIBC Asset Management.

Omicron is going to hit us from early December of 2021. And like in other parts of the world, I will say it does seem to have a dampening effect on the global economy. So Asia-Pacific included. Where Asia I would say stands out is, even in prior flare ups, the Asian region has tended to lag more so than the others. And I think it’s largely because of their approach towards the pandemic. And when I say Asia, it’s largely two fairly different parts of the continent. So in North Asia, that’s Japan, Korea, Taiwan, China, Hong Kong, they seem to have a zero Covid type of policy where they just want to be super cautious until we reach the point where the pandemic is behind us. That kind of a cautious approach certainly makes the economic recovery take even longer.

And then the other parts of Asia, so the emerging Asia, so India, Southeast Asia, et cetera. They have inferior Covid outcomes, because it’s the lack of vaccination, lack of adequate hospital infrastructure, or subpar enforcement. Asia has generally been held back more so than the other regions. If you look at the performance of the MSCI Asia Pacific Index since the beginning of 2020, so just before Covid hit, it’s underperformed the MSCI world quite significantly. So while the MSCI Asia Pacific is up 19% over this time period, the MSCI World is up 42%. Having delivered inferior Covid outcomes has definitely led to underperformance from Asia.

Now, to the question about which companies in Asia have been hit hard. I would say there’s obviously a long list. But there’s some that come to mind. The easy ones would definitely be the travel and leisure type of companies. So the airlines, the airports, cruises, et cetera. And for the right reasons. It also feels to me that retail has not come back in Asia the way it has in the West. And I can think of a couple reasons for that. There was no spike in the savings rate in Asia, like there was in the West, because of the lack of as much government support. And because there was no spike in the savings rate, as a result there was no pending demand or pent up demand for everything that’s out there. So we didn’t really see the demand which has strengthened in Asia the way it did in the West.

Secondly, e-commerce is also less developed in large parts of Asia. And as a result, if you have extended lockdowns, there’s more e-commerce happening here, not so much in Asia. And that’s resulted in weakness in the overall retail sector within Asia as well. Asian benchmarks also have a high rating for Chinese and particularly Chinese technology stocks. Chinese technology stocks have been hit hard in 2021. Not so much because of the pandemic, but largely because of government regulation and the increased interest of the government in the operating models for these companies, and that has weighed on these stocks. And because Chinese internet companies such as Alibaba, Tencent, are very large parts of the MSCI Asia Pacific Index, they have led to further underperformance.

Last but not the least, I would say there’s also large automakers in Asia. So whether it’s Japan, Korea, more so in China as well. And automobile demand, while it has been strong, the supply has just not been there because of logistic supply chain and semiconductor issues. And to that extent, the full upside by Japanese and Korean auto companies has also not been realized, and further contributed to the underperformance.

Because of the share underperformance of the Asia Pacific market during Covid, if the world does at some point move past Covid, I think the outcomes in Asia can be quite profitable. And our approach, I think at this time, is taking a slight build towards more global companies in Asia. So these would be the Sonys, Toyotas of the world. So these are Asian companies with exposure to global markets where the demand remains very strong. And the issues, if any, have been on the supply side. So as the supply side gets fixed, I think there are some Japanese companies that will tend to do very well in that environment.

Other industries, I would say semiconductors come to mind. So the Asian complex, semi-complex, so that’s Japan, Korea, Taiwan, plays a very big role, a leading role in global semi production. And once that comes back into place, I think there’ll be lots of companies in Japan, Korea, Taiwan, that’ll benefit from that. Japan and also Asia in general has some leading robotics and automation companies, where the pandemic will definitely pull forward the demand for their equipment. But also, I would say has increased it structurally in terms of the automation trends going forward. So again, Japanese, Asian companies are doing very well in some of the strong secular trends happening in the world. Those are the ones to go for right now.

And last but not least, I would say, I mentioned the Chinese technology stocks. They have declined in value quite significantly. And that’s because there is expected to be more oversight by the government, which can only be a negative for their returns. So you definitely have sympathy for that argument. But that being said, there has been a lot of damage done to Chinese internet stocks. And it’s definitely worth our while to be looking around for stocks that have sold off more than they deserve. And there could be some good opportunities on that side as well.