Escaping the trade wars that defined the end of 2019, Asian markets were met with yet another challenge in 2020 – COVID-19. Asian markets took the hit from COVID-19 well before the rest of the world, and have consequentially seen the road to recovery much faster. As economic activity picks up, we're getting ready for China to outperform global markets. 

Things are starting to normalise in Hong Kong and China

In China, we believe the worst is behind us after the outbreak of COVID-19 in Wuhan. Companies are gradually returning to work with resumption rates on the rise. According to the Ministry of Housing and Urban-Rural Development construction, restarting rate has reached over 58% in China as at 10 March 2020. As for logistics, over 60% resumption levels particularly higher in areas such as Shenzhen at 97%. Logistics resumption remains key for maintaining supply chains as well as providing inputs to factories and companies for them to ramp up production activity.

On the ground in Hong Kong we have seen the number of cases of COVID-19 levelling off. Although infections are increasing they are not rising at exponential rates seen in the U.S and Europe. The bigger concern at hand is Hong Kong’s vulnerability to imported cases from these regions as globalization means deepened connectivity as well as reliance on global cities. Hong Kong still needs the support of mainland tourism for its economy, therefore may see a longer economic recovery than mainland China.

The sector that have fared best

We believe there are a few sectors/businesses that have been relatively insulated from shocks resulting from the virus outbreak. Although not completely immune to downturns in the market, certain names in education have been outperforming; as the incentive for students to take up online classes rather than offline has been gaining momentum. In addition, we see more demand for online-related businesses such as the gaming, online health care, e-commerce, food delivery and cloud industry, etc. Another business that has suffered minimal impact is infant formula; we have seen the demand for its products remain more resilient during COVID-19 since it is hard to find any other alternative products.

And those that are struggling

Following government orders of isolation and home quarantine, sectors that were hit hardest would be outdoor activities-related sectors such as tourism, restaurants, shopping malls and sportswear, etc. We believe that tourism is still a good theme from a long-term perspective but may take longer before we see an upswing in meaningful recovery, especially in case of outbound tourism. Though the worst has passed in China, all eyes are on the situation in Europe and the U.S for signs of stabilization.

How the pandemic will permanently change societies

We see that companies in China will accelerate their investment in automation of factories and internal infrastructure to support working remotely. In comparison to other countries, China is already a step ahead in terms of their advancement in online-businesses. Post-pandemic, we anticipate for more sectors to shift towards online solutions at a faster rate. An example would be the health care sector where recent changes in insurance policies by government are supporting the growth of online health care services and products.

How China has responded

This is not the first outbreak that China has experienced and the government has long prepared for another pandemic after their traumatic experience from SARS. This time around the Chinese government had better resources and executed strict lockdown measures to limit the spread. Constructing a brand new hospital, housing 1000 new beds with several isolation wards in a short timeframe of ten days reflects the country’s ability to respond to pandemics like COVID-19.

Thanks to China’s massive and steady investment on high tech industries for the last several years, we are also seeing a new age of tech applications used to combat the spread of the virus in China. Front line medical workers have deployed robots that can self-navigate wards to bring food/medication to patients as well as check temperatures; autonomous droids are also working to spray disinfectant onto hospital floors.

Telemedicine is another concept that has reached new found demand at times like these. We believe this was the perfect storm to shift offline consumer behaviour to an online platform. The platform enables a patient to reach medical consultation through an app using artificial intelligence to process the symptom brief then in real-time exchanging the information with a live doctor where a diagnosis and recommendation is approved with professional feedback. This is also integrated with a one-stop shop where the patient’s prescription is registered and medication is then delivered to the patient’s door. All of this is achievable within the comfort of one’s home. Government has been encouraging the use of online healthcare services as the benefits of online allow for the facilitation of physical isolation and reduction of cross infections.

The outlook for Asia

We originally anticipated a full recovery for 2H2020 but believe this could be delayed depending on regions outside of Asia. Domestic demand driven economies like China and India should see a recovery earlier than export driven economies like Korea and Taiwan.

The Chinese government may be expected to step in to boost stimulus spending as small-medium sized firms could face substantial drops in demand for consumer products. We believe that the worst is over for China and the next month and a half we should see supply chains come back. Factories are at 30-40% utilisation so the priority is to resume production gradually while still maintaining control of the outbreak.

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How have they found a middle-ground to resume industry without sparking another wave of infections?

Matt Daniell

Have you factored in that there is a lot of unresolved political issues that will be prominent once the US and the rest of the world stabilises from the virus - the Wuhan virus for example (of the political fallout). You gloss over the trade war as if that is ancient history. What will it be like in the future...? And the CCP's propaganda campaign at the moment. I don't see this as a simplistic return to "how it once was" scenario for China, or the rest of the world.

Joohee An

Dear JC, Good question. The majority of new confirmed cases in mainland China are currently imported cases, rather than local transmission cases. Important measures are currently being conducted in airports and surrounding areas first, which are typically quite distant from industrial areas. Inbound travelers for instance, are required to go through detailed medical screening before being granted access to leave and often are quarantined especially if they have traveled from heavily affected regions such as Europe and the US. Compared to the first wave of epidemic, the second phase seems to be an easier situation to find ways to support economy and contain the spread at the same time. Thank you.

Joohee An

Dear Matt, Thanks for your question as the preceding 'US-China Trade War' certainly remains a fresh topic and we are often asked about the effects of COVID-19 and how it may influence the outcome of preceding issues. During my trip to Australia last year, I discussed in some detail with investors our opinion regarding Trade War. We assume that the conflicts between China and the US including trade war will affect the market for many years to come as the long-running battle between the two countries is based not solely on business (trade) discussion alone. The battle incorporates other significant factors; economically, politically, technologically and culturally. While there is still plenty of uncertainty coming from the US election that is still expected to proceed in November, we would be reasonable to expect Governments in major countries to be more agreeable in helping revitalise their domestic and the global economy once this pandemic comes to an end. Please let me know if you would like more information on our comments from last year regarding Trade War. Thank you.

Patrick Fresne

Thanks Joohee, it was interesting to read your thoughts on this topic.

Jon Scanlon

Thank you Joohee. IF the figures are to be believed, and China and HK have kicked this thing to the curb properly and relatively quickly, they deserve many kudos. They will soon be back and producing again. Problem is, who's buying?

Joohee An

Thanks for your question. I should add to my earlier comments that we also expect Chinese exports to have a negative impact from weakening demand in coming quarters. Having said that, we are also seeing that; domestic demand sub-index of CMI has been picking up (+9.9%pt in Mar vs. -16.7%pt in Feb). Overall, export contribution as a share of GDP has been steadily declining since late 2008 while share of GDP consumption amounts to over 60% of GDP (source: Bloomberg). This shift in global production and consumption has been driven by population growth, increasing industrialisation, income growth, wealth accumulation, increasing consumption among youths and the pursuit of a higher standard of living in China and across Asia. Therefore, we believe that value is starting to emerge from current share price levels and more pronounced, especially for the quality companies of which growth is driven by domestic demand. As investors, we value companies using a range of Competitive Sustainability factors, ESG scores and a long-term investment horizon. If you would like further information on how we identify quality stocks in Asia, please feel free to reach out.