APD | Asia - safe haven for investors amid pandemic

By APD writer Alice

Asia is now a safe haven for investors amid the novel coronavirus disease (Covid-19) as regional economies are more prepared economically to ride out the current crisis as compared to those in the West.

Moreover, central banks in Asia still have room to lower interest rates to stimulate the economies and companies here have stronger cash positions than Western firms.

While the novel coronavirus is strongly spreading in Europe and the US, it seems to be better controlled in Asia, according to analysts at Morgan Stanley Bank.

Governments in Europe and the US are struggling to prevent the pandemic. The most affected countries in Europe, such as Italy and Spain, saw the number of cases increasing day by day, while the number of infections in the US has skyrocketed to 987,000, with over 55,400 deaths by April 27.

It does make sense to tilt your portfolio towards China or towards Asia generally because the virus is unfortunately not yet contained in the West,” said Andrew Harmstone, a senior portfolio manager at Morgan Stanley.

Asian nations boast experience in dealing with disease crises as severe outbreaks are not new to them. The Covid-19 outbreak has often been compared with the SARS epidemic in 2003, which hit mainland China, Hong Kong and Singapore particularly hard, and plunged their respective economies into recession. That helped these governments to position themselves strongly for the next disaster.

Asian economies have learnt lessons from past crises and built strong sovereign balance sheets — which are meant to be deployed to cushion their economies in the face of external shocks, said Lin Jing Leong, investment manager for Asian fixed income at Aberdeen Standard Investments . “It leaves them so much better placed to respond to this outbreak,” he noted.

China, at first reacted somewhat slowly when the new outbreak of Covid-19 broke out, but after that it urgently imposed stringent travel restrictions and isolation measures. Other governments in the region also learned quickly from China’s response to the outbreak.

“China’s response to the coronavirus crisis has taught the world key lessons on the way forward: contain first, then stimulate,” said New York city-based asset manager PineBridge Investments. “Already Asian governments like Hong Kong, Singapore, South Korea, the Philippines, and Malaysia have taken various forceful measures of containment, and that bodes well for the market recovery.”

Another reason for investors hunting for safe spots to park their money to look to Asia amid the current pandemic is that Asian companies have stronger cash positions.

“Asian companies have deep pockets,” said Siddhartha Singh, the investment director of Asia equities at PineBridge.

Most businesses in Asia that PineBridge tracked have responded to a “tough” business environment in the past two years by controlling costs and being disciplined in capital expenditure, among other measures, he said.

“It is not surprising to see that a comparison of top 100 companies (ex Financials) in large Asian and Western markets show that more Asian companies have net cash positions, meaning they have the ability to invest back in the business and potentially gain market share once the dust settles,” Singh said.

Last but not least, central banks in Asia have room to cut rates. While global interest rates are already low, with some countries already in negative territory central banks in Asia generally have more ammunition to cut borrowing costs to support their economies, compared to their US and European peers, analysts suggested.

That implies that Asian central banks have more room to use monetary policy to boost their economies.

“Investors should not forget that real interest rates remain positive and nominal rates even higher among many Asian and emerging markets – in stark contrast to developed markets,” said Aberdeen’s Leong.

This is a matter as it means Asian policymakers have room to adjust. It enables central banks to be proactive in easing rates, providing additional liquidity, she said.

Meanwhile, central banks in the US and Europe could be running out of tools, analysts pointed out. After three rate cuts last year for a total of 75 basic points, the Federal Reserve (Fed) has brought the interest rate to a range of 0-0.25%.

Meanwhile, in September 2019, the European Central Bank (ECB) lowered the basic rate by 10 basis points from negative 0.4% to negative 0.5%. The ECB is now facing pressure to lower interest rates to negative 0.6% to help the European economy fight the Covid-19 pandemic.

(ASIA PACIFIC DAILY)