Asia's post-Covid-19 re-opening is unleashing a steep recovery

Exports resilient in the face of US-China trade war, riding demand from technology, pharmaceutical sectors.

ON June 19, Singapore took a big step forward in its gradual lifting of restrictions to curb the spread of Covid-19.

Under the so-called Phase Two of its re-opening process, it is attempting to safely re-start most of its domestic economy. Shops, restaurants and even wellness establishments have been allowed to open their doors, subject to having safe management measures in place. Restrictions on social interactions have also been eased.

If all goes well, it could lead to Phase Three, which would involve the resumption of larger social, cultural, religious and business gatherings.

Judging from the experience of countries that managed to bring Covid-19 under control earlier, Singapore could now be on track for a steep recovery in economic activity. And, despite a resurgence in infections in many places that have re-opened, there is growing confidence that aggressive testing, contact tracing and social distancing measures will make another round of tough lockdowns unnecessary.

"The opening up has happened quickly, for better or worse," said Lai Yeu Huan, senior portfolio manager at Nikko Asset Management, in a recent interview with The Business Times. "The rebound has been much faster than we thought." He added that economies across the region are now charting a V-shaped recovery, but "with the right leg of the V rising more slowly, and tapering as we go higher".

Indeed, analysts and fund managers have gone from worrying about the depth of the economic slump that Covid-19 caused across the region in H1 2020 to handicapping how quickly economic activity will recover to 2019 levels. They are also closely watching out for which countries will lead the recovery, and how the drivers of long-term growth for the region might shift.

One key factor fuelling the current economic recovery is the aggressive fiscal and monetary stimulus implemented by governments around the region during the enforced halts in economic activity to prevent a cascade of defaults and bankruptcies.

Estimates by Morgan Stanley Research puts the size of government measures at some 9 per cent of GDP for Asian countries excluding Japan (Asia ex-Japan).

This included not just expenditure measures like cash handouts and wage subsidies as well as revenue measures like tax cuts and government fee waivers, but also quasi-fiscal and credit measures like the deferment of loan repayments and credit guarantees.

Such quasi-fiscal and credit measures alone amounted to some 4.9 per cent of GDP for Asia ex-Japan.

In fact, the Asia ex-Japan region is likely to return to its pre-Covid-19 GDP levels within a year, according to Morgan Stanley. China could recover by as early as Q3 2020, not least because it was among the first to lift its Covid-19 restrictions. China also has a large domestic economy, and relatively high structural growth rates.

India, the Philippines, Indonesia, Korea, and Taiwan are likely to see their GDP recover to pre-Covid levels between Q4 2020 and Q1 2021. While India, the Philippines and Indonesia are less exposed to the global impact of Covid-19 and have relatively high structural growth rates, Korea and Taiwan mounted a more effective response to Covid-19. India, the Philippines and Indonesia also have less savings to rely upon if their Covid-19 containment efforts were to weigh on their economies for a prolonged period.

Finally, Thailand, Malaysia and Singapore will probably only see their GDP recover to pre-Covid-19 levels in Q2 2021, according to Morgan Stanley. These countries are highly export-oriented, so their recoveries will hinge on global developments. Singapore was also one of the last countries in the region to exit from its Covid-19 containment strategy. Meanwhile, Thailand is heavily reliant on tourism, which is unlikely to recover for a long time. Malaysia and Hong Kong also face ongoing political uncertainty.


The big question for investors going forward is whether Asia's medium-term growth potential has been impaired by Covid-19.

One important concern is tension between the US and China, and the impact that might have on trade and globalisation. Indeed, this was the main narrative for markets in the region before Covid-19 swept across the world. Yet, trade data going back to 2018, when the US-China trade war started, suggests that China and the rest of Asia are no pushovers.

Frederic Neumann, co-head of Asian Economic Research at HSBC, noted in a recent report that tariffs slapped by the US on Chinese goods had the intended effect. "Mainland China lost market share in the US, especially in goods that got tariffed," he said in the report. "Among some of the 'winners': Mexico, Vietnam, and Thailand gained market share in the US, plus the likes of Germany, India, Taiwan, and Malaysia."

But that wasn't the whole story. While China lost market share in the US, it gained market share elsewhere in the world. "In fact, Chinese producers have increased their global market share, more than making up for their loss in the US."

This has partly come at the expense of Korea, Japan, Singapore, and Taiwan. On the other hand, Vietnam and Malaysia also gained ground globally. "From this perspective, it seems that exporters from more developed economies got squeezed by Chinese competitors in other markets outside the US, while some economies with cheaper labour costs managed to hold their own," Mr Neumann said in the report.

Looking specifically at the semiconductor sector, Mr Neumann found that China lost market share in the US over the last two years while Malaysia saw its market share increase substantially. "And yet, when we look at changes in global market share, an entirely different picture emerges: mainland China gained the most, followed by Vietnam, and only then by Malaysia."


Even more interestingly, Asia seems to have decent exposure to segments of the global economy that are likely to lead in the recovery ahead.

In the technology sector, Covid-19 has sparked a surge in online activity as "work from home" becomes a way of life for many people. Video conferencing, distance learning, online gaming and e-commerce are all putting increasing strain on cloud computing infrastructure.

Joseph Incalcaterra, chief economist for Asean at HSBC, said in a recent report that the computer server market, which was worth nearly US$60 billion in 2019, is likely to expand significantly this year. "In 2019, Amazon alone added approximately 2,000 cloud servers a day, a rate which may have risen 10-fold so far this year."

According to him, finished servers are largely assembled and shipped from China and Mexico, but most of the value-add comes from the rest of Asia. For instance, the DRAM memory chips in these servers are produced largely in Korea. Intel produces about 90 per cent of the processor chips, with a supply chain that runs through China, Malaysia and Vietnam. Also, the supply chain for hard disk drives and solid state drives is centred in South-east Asia.

Then, there is the 5G infrastructure and smartphone replacement cycle. "Despite recent delays, 5G investment is likely to accelerate in the coming years as firms and governments seek to upgrade telecommunications networks to ensure 'technological readiness' for the future," Mr Incalcaterra said in the report.

Another sector that is likely to see strong growth in the wake of the Covid-19 pandemic is pharmaceuticals. On the face of it, this is less of an Asian story, except perhaps for Singapore, where healthcare exports account for nearly 6 per cent of its GDP, Mr Incalcaterra notes in the report. Malaysia's healthcare exports account for about 1.4 per cent of its GDP, reflecting its role as the world's largest medical glove producer. "While Asia plays a less central role in the global pharmaceutical supply chain, at least compared to tech, China's dominance in low-cost active pharmaceutical ingredient (API) production is noteworthy," he said in the report.

By some estimates, China produces around 40 per cent of the world's APIs, which it classifies as organic chemicals. Some 80 per cent of APIs in the US are imported from China. "These relatively low-margin products are quite small in value terms, only accounting for about 2 per cent of China's total exports. However, they are a crucial aspect of the medical supply chain, with few producers of specific APIs," Mr Incalcaterra said.

Of course, Asia has a fair amount of exposure to sectors that are likely to see reduced demand because of Covid-19. Notably, weakness in commodities and tourism will affect countries in South-east Asia.

"Singapore and Thailand are the two economies most reliant on international travel, including both traditional tourism and transport services exports. Thailand has the highest exposure to the former, while Singapore relies most on the latter given its role as a regional air travel hub," Mr Incalcaterra said.

Within the commodities sector, Malaysia stands out as the only net exporter of oil and gas in the region, which could be bad news for its economy. The slump in the sector would also weigh on oil and gas equipment exports, which would hurt mainly Singapore and Korea.

Taking everything into account, Mr Incalcaterra figures that Vietnam, Taiwan, Singapore, Malaysia and Korea are best positioned to see strong export growth in the post-pandemic era.

"This ranking largely reflects the fact that these economies are quite exposed to tech or pharmaceutical supply chains, or both in the case of Singapore, which offsets a weaker export outlook in other areas," he said.


With the unfolding recovery across the region, and aggressive stimulus by central banks, markets across the region have already rallied strongly from their March lows.

In fact, the Asia ex-Japan basket of stocks is now less than 5 per cent below where they were at the beginning of the year.

Kelvin Tay, regional chief investment officer at UBS Global Wealth Management, is expecting further upside though.

"Asia ex-Japan forward P/E has re-rated to 14.7 times, which is not unusual in the early stages of an equity rebound out of recessionary troughs," he told The Business Times by e-mail last week.

"Singapore and India are our preferred equity markets due to attractive valuations relative to their peers in the region, while Malaysia, Thailand and Hong Kong are our least preferred countries for exposure," he added.

"China's strong outperformance year-to-date has meant that valuations have surged ahead of its peer group. And, with the US elections looming, where anti-China rhetoric is likely to pick up, hence affecting sentiment, we have moved China to a neutral."

Another way to ride the recovery in Asia is by investing in high-yield bonds, Mr Tay said. "Asian high-yield bonds remain very attractive as spreads are still rather elevated while fundamentals for the largest issuers in the China property sector, representing about 35 per cent of the index, remain resilient."

Mr Lai of Nikko is also adding stocks to the portfolios he manages. "The play now is to build back exposure to the market with stocks that will do well as economic activity recovers into 2021," he told The Business Times.

Within the Singapore market, these would include transport player ComfortDelGro and the leading retail property Reits. "But we are not going as far as buying airlines," he added. "Those have recovery profiles that stretch beyond 2021."