- The strong earnings growth profile of Asian companies can withstand any near-term pressures from expectations of monetary policy unwind.
- While there is some near-term uncertainty around the outlook on inflation and Covid-19, any potential weakness in Asian stocks amid a spike in volatility will be an opportunity to raise long-term allocations.
- A potential risk for equities is if inflation overshoots expectations and becomes far more entrenched which could potentially lead to faster policy normalization globally.
As vaccine rollouts gain pace in more developed parts of Asia, the services sector recovery strengthens, and the region gets tailwinds from US and global fiscal expansion, economic recovery is expected to continue to gain pace in 2021 and 2022.
In line with this, we expect strong earnings recovery this year for Asia ex-Japan equities and double-digit earnings growth in 2022. A large part of this growth will be driven by sectors such as memory, semiconductors, electric vehicles, internet/e-commerce, and gaming, whose profit cycles are underpinned by structural themes.
At the same time, earnings will also get support from a recovery in cyclical sectors such as energy and commodities, and export-oriented industries that will benefit from the reopening and economic recovery in the developed world.
The Asia equity story has become less about the US dollar and commodities, and increasingly more about the outlook of technology plays and sectors that possess exciting long-term investment prospects and have the potential to generate sustainable earnings growth. Listed Asian companies generally possess strong balance sheets and ample cash reserves that have only swelled further during the pandemic. This gives them the buffer to withstand any risks from either policy changes or Covid-19 outbreaks.
As global growth recovery will likely be uneven and asynchronous, monetary and fiscal policy support is expected to remain, which will support equities. The key risk to this view, and to equities in general, is if inflation overshoots and becomes more persistent, which could set policy normalization in motion earlier than expected. Even then, equities will likely prove to be the inflation hedge relative to bonds. Against bonds, equities still appear attractive on real equity risk premium.
Covid-19 too remains a risk for Asia, with rolling waves of infections and mutations of the virus not ruled out. This, and uncertainties around inflation and the commodities price outlook, are expected to keep Asian equities volatile in the near term. However, the mitigating factor is that most global investors appear cognizant of these issues and many of them are already under-allocated to Asian stocks.
Overall, while there are reasons for some short-term caution, investors should look past near-term risks, focus on the dynamism of Asian listed firms and look to raise long-term allocations to Asian stocks on any potential weakness.
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APAC Equity Strategist
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