1 December 2020

As the holiday season approaches, much of the world is battling a Second Wave of the Coronavirus. To be sure, world leaders are confronting unprecendented challenges, and tough decisions are required. Throughout the pandemic, many policymakers, as well as members of the media and general public, portray the options as a choice between saving lives and preserving livelihoods. Both, of course, are laudable aims.

But, is it a false choice? Asia’s Covid experience has been distinctly different. The region’s approach, including New Zealand and Australia (indeed, led by these nations in many ways), has emphasised that successfully addressing the health emergency is a pre-condition to restoring livelihoods, not an alternative objective. To what degree has Asia’s approach been reflected in different health and economic outcomes? Will these trends be continued through the second wave and into 2021? What are the implications for the region’s financial markets in the year ahead?

Asia’s Covid Experience: First In, First Out

By now, hopefully, most people are aware of Asia’s relative success in containing the spread of the Coronavirus; thereby, limiting the mortality rate. But, it is worth pausing to observe the enormity of the disparity. Indeed, compared to the comparative low Asian fatality rates in the Chart above, deaths per million people are over 800 in the USA, Brazil, Spain, UK, France, Italy, Belgium, Argentina, and Peru.

I will leave it to the experts to assess exactly why Asia’s response to the Covid outbreak has been so much more successful than in most western nations (although I do have strongly held beliefs on the topic). Prior to the pandemic, however, Johns Hopkins rated individual countries’ ability to cope with potential health emergencies. The Chart above illustrates that Australia, Thailand, Korea, Malaysia, and Singapore all ranked in the top 24 countries (out of 195 worldwide). On the other hand, however, the USA and UK were #1 and #2 respectively. And, France, Spain, Belgium, Brazil, and Argentina were also in the top 25 nations.

Therefore, technical/institutional capabilities are not solely decisive. Leadership matters. Compliance matters. Asia took tough, decisive decisions early, including closing borders to travel. The region leveraged its technical advantages; implementing extensive Covid testing supported by technology-based (GPS) tracing, and strict enforcement. Not only was the initial outbreak soon contained, but this approach has allowed countries to respond successfully to localised outbreaks occurring later. Indeed, Australia, Japan, and even Korea all suffered renewed outbreaks last summer, but these were quickly brought under control. As the Second Wave emerges world-wide, there have been virtually no Covid-related deaths in large parts of Asia in recent weeks.

The Chart above illustrates that Asia’s success in containing the pandemic has been reflected in the region’s recent relative economic outperformance. So far, however, Asia’s economic recovery has been uneven. Even within the region, those countries most successful in curbing infections — Taiwan, Korea, Singapore, Vietnam, and China — have outperformed those that have struggled to contain the spread, e.g. India, Philippines, and Indonesia.

Is Asia’s Uneven Recovery Sustainable?

Make no mistake, Asia’s road to recovery has not been easy. As I projected in an earlier blog, the region’s 2020 recession has been far more severe than during the Global Financial Crisis (see Covid Forecast: Don’t Suffer a Lack of Imagination”). As the Chart above illustrates, the scale of the downturn has been more similar to the 1998 Asia Crisis. In comparison to the previous two slumps, the global environment has been considerably more challenging in 2020. Indeed, during the Asia Crisis economic growth in both the advanced economies and China remained strong. Even during the GFC, Asia was supported by robust GDP growth in China, partially cushioning the impact of the severe recession in the developed economies. In 2020, however, both China and the advanced economies have experienced deep slumps.

Fortunately, the global environment will improve in 2021. Indeed, the IMF forecasts GDP growth of 4% and 8% in the advanced economies and China respectively next year. Already, the Chart above indicates that many of Asia’s trade-oriented economies are experiencing rebounding exports. Indeed, the following Chart shows that recent PMI readings in the manufacturing sector are already above (or near) January 2020 levels. It is important to emphasise again the uneven pattern of the region’s recovery. North Asia’s rebound (Taiwan, Korea, China, Vietnam) has been considerably stronger than in India, Philippines, and Indonesia.

As in the developed economies, however, the momentum behind Asia’s recovery has cooled in recent months. Likewise, mirroring the performance in the advanced nations, Asia’s consumer-oriented service sector’s rebound has lagged that of the industrial areas. As a result, additional fiscal stimulus is likely to be required to ensure the upturn’s sustainability. The following Chart illustrates that several Asia/Pacific countries — Japan, Singapore, New Zealand, Australia, and Thailand — implemented large-scale fiscal stimulus. On the other hand, despite the more severe economic impact of Covid, India, Indonesia, and the Philippines have not pursed such aggressive budgetary expansion.

Fortunately, comparatively low levels of government debt provide Asian/Pacific governments considerable fiscal space to provide additional support to consumers and businesses if required next year. Asia is well positioned relative to the USA and Europe. Mounting private sector debt may eventually pose challenges to monetary policymakers in China, Thailand, Malaysia, and Vietnam.

Healthy External Sector Supports Currencies

Asia currencies should be helped by the generalised US dollar weakness I anticipate in 2021. Lower Covid risks and Asian GDP outperformance relative to the USA and Europe will provide fundamental support for the region’s exchange rates. Furthermore, external balance sheets are healthier than during past crises, and most nations’ external financing requirement is very low (see following Table). Malaysia is a bit more problematic perhaps.

To be sure, capital inflows into Asian markets have started to increase lately, as reflected in the uptick in foreign exchange reserves over the past year. The following Chart, however, illustrates the increase in the international reserves has been modest so far; suggesting global investors’ interest in the region could still rise significantly.

My top choices include Singapore, Korea, Taiwan, and China where the currencies are fairly valued, Covid performance has been good, and economic recovery appears most sustainable (see following Chart). I am less optimistic on the Philippines and India, which appear overvalued, and where the Covid experience has lagged the rest of the region. Thailand’s success in containing the virus is already reflected in the THB price. Malaysia’s releatively weak external balance sheet is concerning, but the currency is cheap. The very undervalued Japanese yen may outperform them all: appreciating beyond Yen/USD 100 (double-digit level)!

Climate Change: Will Get More Market Attention

In a recent study, I suggested Climate Change will be the top macro story over the next decade, after the pandemic is controlled. I ranked 90 countries according to their economic vulnerability to rising global temperatures (see Climate Change: Who’s Preparing, Who’s Not?).

Although a thorough discussion of the implications in Asia is beyond the scope of this blog, a few early headline observations may be relevant for the period immediately ahead. First of all, despite the need to lower Green House Gases world-wide, the Chart above illustrates CO2 emissions are still rising throughout Asia. Of course, on one level, this is to be expected, as the region is still in the industrialising phase of economic development. The largest gains are in Vietnam, Philippines, Indonesia, India, and China (the world’s top polluter).

I expect two key challenges will receive considerable policy attention in the coming years. First of all, Asia will need to use energy more efficiently. The chart above suggests that’s already happening: emission are rising less quickly than overall energy use. However, these productivity improvements have been predominately in China, Australia, and New Zealand.

Another key reason for the region’s out-sized emissions growth is the continued reliance on fossil fuels, which are largely imported. The Chart above llustrates these highly-polluting sources account for 72% of Asia’s electricity generation compared to 40% in Europe. In particular, the extensive use of coal, especially in India, China, Indonesia, and Australia, will challenge efforts to reduce emissions. I would expect efforts to diversify energy sources (perhaps into LNG initially), including the development of renewables in the decade ahead. Failure to mitigate climate risks could become an economic headwind in the future.

Strategic Considerations

• Asia will be the world-wide economic growth leader in 2021. North Asia will lead the way, but even laggards like Indonesia, India, and Philippines will gain momentum as pandemic risks recede.
• The Chart above indicates that Asian equity markets are cheap relative to developed markets. Economic recovery, low interest rates, relatively attractive valuations, and a weak US dollar point to Asian equity outperformance. I expect double-digit returns in 2021.
• Asian currencies should appreciate. I am especially optimistic on CNY, TWD, and KRW. The Japanese yen may be the region’s top performer. I am less keen on INR and PHP. For the more adventurous, BRL, MXN, TRY, RUB, and ZAR deviate most from their long-term norms.
• To be sure, China may record 7-8% GDP growth in 2021. However, this does not represent a return to the 7-10% annual growth of past periods. To the contrary, China’s long-term GDP growth potential continues to slow towards sub-5% (see my blog “China: Growth Slowdown Just Beginning”). Asia can not rely on China to be the growth engine in this recovery.