Asian Equities Q3 Outlook

Over the long term, the economic effect of the coronavirus is likely to be minimal, but short-term pain will persist for the rest of 2020

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As more and more global economies start to open up after the coronavirus-related lockdowns, experts are looking to the Asian markets for cues on what comes next, even as global equity markets surged ahead in the second quarter of 2020.

We expect that over the long term, the economic effect of COVID-19 will likely be minimal, but we also maintain our view that short-term pain will persist for the rest of 2020.

Michael Wu, Morningstar's senior equity analyst for financials, expects that the COVID-19 pandemic and subsequent economic slowdown will continue to impact upcoming earnings in the first half of 2020. "However, we believe the markets have looked past this, as reflected in the recovery of equity markets in Asia," Wu says, reiterating that the long-term economic effect of the coronavirus outbreak is likely to be minimal.

"Ongoing fiscal relief and loose monetary policies are supportive for equity markets in the medium term," he adds. "However, capital markets are expected to remain volatile, contingent on the risk of further COVID-19 outbreaks and the pace of economic recovery. Balance-sheet strength, a strong liquidity position, and acquiring stocks at an attractive margin of safety are key considerations."

Third-Quarter Outlook
Wu recently authored a report titled "Asia Equity Market Outlook: Third-Quarter 2020"in which he noted that further gains in Asian equities are contingent on COVID-19 and economic recovery.

The Morningstar Asia Markets Index posted a 19% increase in the second quarter to June 28. With some companies posting a strong recovery in their share prices, the price/fair value in our Asia coverage universe increased to 0.92 times from 0.80 times in the quarter, according to the report.

"Overall, the interactive media, consumer cyclical, and technology sectors were expected to be the beneficiaries in any initial recovery, and their share prices outperformed accordingly," Wu says, noting that selective opportunities remain in these sectors, particularly in travel-related Macau Gaming and, on concerns of a more gradual recovery in international travel.

The utilities and consumer defensive sectors underperformed, while financials and real estate also lagged in performance. Wu expects financials and real estate to benefit in a latter part of a recovery.

Risk of a Trade War
For Wu, short-term risks include the pace of the economic recovery in the Asia region and the risk of further trade disputes between China and the United States, which again increase uncertainty in capital markets. These risks are true for China and Hong Kong and also for markets like Singapore.

In Hong Kong, Wu sees capital market activities unaffected by recent political turmoil, with mainland companies continuing to raise capital in Hong Kong. He points to the recent secondary listings of and NetEase as being reflective of this trend.

Opportunities Abound
Wu believes that, in general, "We have already seen a strong recovery in companies in the interactive media, consumer cyclicals, and technology sectors. There are still selective opportunities remaining in consumer cyclicals in Macau gaming and online travel companies. In the technology space, smartphone component manufacturers have recovered strongly, but we still see value in Largan Technologies, a camera lens supplier to Apple."

In Hong Kong, Wu sees landlords with office exposure as undervalued. "This includes Swire Properties and Hongkong Land. As we expect capital market activities to be unaffected, we expect long-term demand for office space to pick up again. This will be supportive of office rentals, which have weakened at the end of last year and early this year due to social unrest, the coronavirus pandemic, and uncertainty over the security law. On the supply side, total office stock is low relative to other financial centres such as London and New York City," Wu notes.

Specifically for Singapore, Wu sees opportunities in industrial companies such as ST Engineering, which he expects will see a short-term impact on its airline maintenance business, but he expects that its defence and cybersecurity businesses will provide a buffer.

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