The prospects of further waves of Covid-19 remains front of mind for many investors in the region. When tracking the virus, Asia is broadly divided into those economies where daily new cases have stayed in a manageable range, namely China; those where daily cases have generally been contained since reopening such as Taiwan, Malaysia, Thailand and Singapore; and those where daily new cases have continued to rise or have stayed elevated relative to history, such as India, Indonesia, the Philippines and Korea.
Some countries have adopted selective and localised measures as they try to balance resuming economic activities and managing the public health threat. Specifically, Indonesia has extended its containment measures, while Korea has been switching to tighter measures given the rise in local infections. Elsewhere, policymakers in China, the Philippines and Singapore have either eased or guided for easing in containment measures.
Overall, this localised approach in containment versus the blanket approach earlier this year, together with accommodative policy, all points to a gradual cyclical recovery across Asia.
This recovery is particularly apparent in China, where our proprietary indicator suggests that economic activity continues to bounce back strongly. Chinese GDP is on track to register a robust Q3 number, supported by stronger services and external demand, although the pace of improvement has moderated relative to Q2 due to floods and payback from the shopping festival. Looking ahead, we expect services activity to continue to normalise as key laggards - travel and leisure - are gaining momentum after the loosening of restrictions in mid-July.
Importantly, the speed and effectiveness at which China has able to deal with recent virus relapses, while avoiding wide-scale shutdowns, mitigate a downside risk that concerned us as recently as a couple of months ago. Although we still anticipate clusters to occur going forward, China has acquired enough capacity to conduct mass testing relatively quickly. This capacity allows it to identify and quarantine the transmission chains to prevent even larger outbreaks.
Positive corporate earnings picture
Against an improving macro backdrop, corporate earnings in China have been good, clearly beating consensus. We expect this to be further sustained based on the ongoing recovery.
If we look at Q2 results of companies that have reported on the MSCI China and the MSCI China A-onshore as at the end of August - both have recorded sizeable earnings beats if measured by the number of companies. These positive earnings point towards meaningful earnings growth recovery in China and is in line with our view that China is benefitting from a first in-first out dynamic when it comes to Covid-19.
The favourable earnings picture has been broad based, which is encouraging, but the outperformance has been more notable in online economy names such as e-commerce, media and entertainment as they continue to deliver solid results. This echoes with our belief that there are structural changes in the economy, on top of a cyclical recovery in China's consumption space.
The majority of large e-commerce platforms have revised up their full year estimates through this earnings season. Also, consumer goods companies are reporting that e-commerce channel growth has been very robust, as we would expect, and are adjusting channel and product strategy to react to this change which is likely to be structural.
Continued US-China tensions
As China continues on the path to recovery, geopolitics will increasingly come into focus. Investors should expect ongoing friction with the US, irrespective of the election outcome, given the tone towards China relations from both sides of Congress in the US.
On the trade front, reports on the US-China deal suggest progress on trade issues, with both sides committed to making the Phase 1 agreement reached in January a success. This is consistent with market expectations of the Phase 1 deal being likely to hold, even as US-China tensions flare up along non-trade dimensions such as technology and access to capital.
Overall, we retain a positive view on the outlook for regional equity markets, based on the shape and strength of economic recovery, the ongoing development of financial markets and expected medium-term relative weakness of the US dollar. None of these drivers will be meaningfully altered by the outcome of the US election.
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