Manulife expects K-shaped recovery, bullish on Asia equities

Singapore

IT is going to be a K-shaped recovery, and Asia equities which are generally trading at 30 per cent discount compared to those in developed markets will offer a higher chance for capturing alpha as the roll-out of the Covid-19 vaccines and reopening of borders will bring closer the normalisation of economies.

In its 2021 Investment Outlook, Manulife Investment Management said Asia and emerging markets are poised to lead the global economic recovery, and advised investors to stay invested and diversified in 2021.

"The expected sector rotation in Asian equities will present a wider opportunity set for capturing alpha," said Ronald Chan, chief investment officer, Equities, Asia (ex-Japan), Manulife Investment Management.

Future earnings growth for Asian equities are 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," Mr Chan said.

Half of Asia's population is expected to be 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," Mr Chan added.

China remains a bright spot next year as the economy continues to recover, driven by the three main pillars of technology, sustainability and "dual circulation" prescribed in its 14th five-year plan. This year alone, the mainland has attracted US$20 billion of inflows.

Little change is expected in China's relationship with the US under the new Biden administration. Talks and competition between the two nations are expected to continue, albeit in a more predictable and diplomatic manner.

"Coupled with the fact the two countries' leaders have climate change as a common goal, we could potentially see improvements in the relationship," Mr Chan said.

North Asia is favoured over South-east Asia in 2021, partly due to the potential softening of Sino-US relations, a positive impact on procyclical currencies in the sub-region from a weak US dollar, and more capital flow into China given the growth divergence it has with the rest of the world.

Sectorwise, new technology such as 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.

More attention is expected on sustainability-related industries such as electric vehicles and battery storage and supply chain, as the world put stronger emphasis on climate change.

With economic recovery on the horizon, it is worth keeping an eye on cyclical and value names such as those in the property sector.

Frances Donald, global chief economist, Manulife IM, warned the pandemic has hit the services side of the economy and was much less painful for the manufacturing side.

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

"Overall, we expect the ongoing weakness in the US dollar and central banks likely to stay dovish in the next six months to become the more important market drivers for Asia."

Given the persistent low interest rate environment, investors may need to take on more risk and tap higher-yielding products such as infrastructure and agriculture to generate the income they seek, Ms Donald said.