Asia, Emerging Markets to lead K-shape global economic recovery: Manulife

December 30, 2020

HONG KONG -- While stabilisation of markets seems to be within reach with the introduction of new COVID-19 vaccines and new leadership in the US, investors should expect the process to be gradual and long, Manulife Investment Management says in its regional outlook for the year ahead. Structural changes caused by the pandemic will take time to reverse, it says.

Frances Donald, Global Chief Economist, Manulife Investment Management, says: "One of the most critical features of the COVID-19 recession globally is that it more disproportionately hits the services side of the economy. It was much less painful for the manufacturing side.

"We refer to this as the K-shape recovery going into 2021, of which sectors that provided the essentials during the pandemic, such as manufacturing and technology, will continue to grow, while those more driven by demand and supply dynamics, such as retail and services, may continue on a downward slope.

"Overall, we expect ongoing weakness in the US dollar, with central banks likely to stay dovish in the next six months to become the more important market drivers for Asia. Given the low interest rate environment, which could be with us for another decade or so, investors may need to take on more risk and tap higher-yielding instruments that were previously under-owned, such as infrastructure and agriculture, to generate the income they seek."

Ronald Chan, Chief Investment Officer, Equities, Asia (ex-Japan), Manulife Investment Management, says that with the roll-out of COVID-19 vaccines, reopening of borders and normalisation of economies in Asia seem to be within reach.

He believes staying invested and diversified will continue to benefit investors in 2021, as the expected sector rotation in Asian equities will present a wider opportunity set for capturing alpha.

"Asian equities in general are trading at a 30% discount versus developed market equities, and future earnings growth is expected to be in the high teens. This is because Asia is still benefiting from external demand, particularly when growth in developed markets will be propped up by fiscal policy and, in turn, support Asia exports," Ronald said.

"In addition, it is expected that half of the Asia population will have been vaccinated by the second half of 2021, which means borders will reopen and growth within Asia will resume. Coupled with supply chain relocation and implementation of the Regional Comprehensive Economic Partnership (RCEP) free trade agreement, we can expect growth in trade within the region."

Having attracted US$20 billion of inflows in 2020, China remains a bright spot in 2021 as the economy continues to recover, driven by the three main pillars of Technology, Sustainability, and 'Dual Circulation' prescribed in China's 14th five-year plan, Ronald says.

"China's relationship with the US is expected to be about the same under a new US President. Talks and competition between the two will continue, but a Biden administration could be more predictable and less hostile. Coupled with the fact the two countries' leaders have climate change as a common goal, we could potentially see improvements in the relationship."

Ronald says that, overall, Manulife favours North Asia over Southeast Asia in 2021 in part due to potential softening of Sino-US relations, a weak US dollar to have positive impact on procyclical currencies in the subregion, and more capital flow into China, given the growth divergence it has with the rest of the world.

"Sector-wise, we believe new technology like artificial intelligence, automation, 5G, and biotech will continue to perform as a result of the pandemic and the need for businesses to adopt some of these technologies to maintain growth," he says.

"There will be more attention on sustainability-related industries such as electric vehicles and battery storage and supply chain, as countries around the world place stronger emphasis on climate change. Lastly, with economic recovery on the horizon, it is worth keeping an eye on cyclical and value names such as those in the property sector."

"News of the vaccine is positive for growth, but some trends may have changed permanently, such as more jobs shifting to permanent work-from-home model, and some business and/or factories are forever lost or relocated. We believe the strong fundamental of Asia, supportive global backdrop, and the multi-year sustainable investing trend makes Asian bonds an attractive asset class in 2021." (ATI).