2020 has been an unprecedented year in many ways. One of the most important lessons for market participants was equity markets’ ability to look through short-term significant challenges and focus on the medium-term growth outlook. Despite a severe slump in global growth and massive Main Street job and income losses due to the pandemic, equities are up anywhere between 5-20% globally. We think in 2021, the ‘look through’ theme will remain the dominant theme, despite some hiccups and bumps along the way. We think in 2021, investors will likely focus on an eventual 2022 renormalization driven by potentially even better vaccines/therapeutics to help contain the spread of the virus. That said, we anticipate procurement, funding and immunization implementation strategies will likely become one of the key differentiating factors behind Asian equity market moves in 2021.
Overall, we remain constructive on Asian equities in 2021. We see several positive factors that support this view. First, gradual economic/earnings recovery ahead could be aided by better vaccines/therapeutics. Whereas 2020 was all about assessing the rate of new virus infections, shape of the pandemic curve and vaccine news flow, 2021’s outlook is likely to be all about assessing vaccines’ efficacy, availability, durability, funding and most importantly, implementation of immunization plans.
While Covid-19 cases continue to rise in some parts of Asia, we have seen gradual normalization in activity. Comparable Google mobility data for mainland China is unavailable but a number of anecdotal indicators suggest that activity has almost normalized to pre-pandemic levels in mainland China — but also in Korea, Taiwan and to large extent, Hong Kong SAR. Even in India, Indonesia and the Philippines, despite elevated cases, activity is picking up, as indicated by Google mobility indices. This resulted in improved macro data, and in many cases, beating market expectations, particularly in China.
Secondly, policy support will remain ample at least in 1H. Since the onset of the pandemic, policy makers have embarked on unprecedented monetary as well as fiscal support to ensure the sanctity of financial markets, and to prevent any precipitous fall in end-demand. These measures have ranged from policy rate cuts, asset purchase programs from central banks, massive expansion in fiscal deficits and liquidity support. With economic growth expected to continue to pick up and possibly the worst of the slowdown and pandemic behind us, it is natural to expect that policy will be less accommodative going forward. However, we think a full withdrawal of policy crutches is very unlikely, at least in the 1H of 2021. Overall we expect a ‘Goldilocks’ with modest reflation, but interest rates remaining subdued at least in 1H21.
Thirdly, with the uncertainty of the US election largely behind us, a Biden victory is a good outcome for Asian equities. It reduces the risk premia attached to equities in general, given our expectations of more predictable foreign/trade policy, which would particularly be beneficial for China equities. We continue to believe that if we see a Biden ‘Blue-wave’, the chances of a significant fiscal stimulus from the US over the next few years is likely quite high.
Finally, strong equity liquidity conditions are likely to last at least until 1Q21. Modest cyclical recovery in the near term on rising optimism around vaccines/therapeutics is likely to exert modest upward pressures on long bond yields, which in our view should imply some likelihood of rotation from fixed-income to equities, as investors chase yields and returns.
For more insight on our equities outlook for 2021, read our complete report here.
Joint Head of APAC Equity Research
APAC Equity Strategist
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