The prospect of an effective Covid-19 vaccine being introduced next year should boost cyclical industries that have suffered most during lockdowns, while structural themes will be accelerated, Fidelity Asian asset heads told a webinar this week.
Strong GDP growth and a sharp recovery in corporate earnings will be led by reinvigorated consumer spending, and further buoyed by the recent signing of the Regional Comprehensive Economic Partnership by 14 countries in Asia-Pacific, covering 2.2 billion people and 30% of the world’s economic output.
“The key is to identify long-term, sustainable opportunities,” said Victoria Mio, director for Asian Equities at Fidelity.
Mio likes the depressed materials and industrials sectors, which should be further boosted by a weak dollar, consumer discretionary, in particular the hospitality and travel industries, and healthcare where demand will continue to grow.
In China, following the announcement of the country’s 14th five-year plan with its emphasis on developing technology self-reliance and strengthening domestic consumption, Mio sees opportunities in financial services, healthcare, technology and premium consumer goods sectors.
On the other hand, she recommends underweighting defensive stocks (such as utilities) in the region and to reduce holdings of expensive quality stocks that have been strongly supported since the start of the pandemic.
“However, selecting winners will be more essential than ever next year, because there will be a wide divergence in earnings per share within and across sectors,” said Mio.
Fidelity offers several Asia Pacific equity products to Hong Kong and Singapore retail, investors, including the $2.9bn Asia Focus Fund managed by Dhananjay Phadnis, the $1.1bn Asia Pacific Opportunities Fund run by Anthony Srom, and the $1bn Asian Equity Fund managed by Suranjan Mukherjee.
GLOBAL EQUITIES
Although the outlook for Asia predicated on a recovery from the pandemic is positive, Fidelity believes that globally Latin America and EEMEA (Eastern Europe, Middle East and Africa) have the largest exposure to the re-opening of trade.
Meanwhile, West European equities are highly geared to positive vaccine news, and they have become very cheap, with the Stoxx 600 index’s two-year forward price-earnings ratio trading at a 20% discount to the MSCI World, according to Matt Quaife, head of multi-asset investment management, Asia.
“Also ESG will continue to be a powerful investment theme, with ESG leaders outperforming during the Covid-19 sell-off in March, and subsequently maintaining their relative strength,” he said.
In fact, Fidelity surveys have found that social issues have taken priority at companies this year, even to the extent that maximising shareholder returns has been less important, added Viral Patel, a director for equities.
Patel also pointed out that there is generally positive sentiment among “bottom-up” analysts investors towards individual stocks, while the structural growth trends in IT and healthcare remain intact.
FIXED INCOME
Fixed income investing, however, will remain a challenge in an environment of low and negative government bond yields.
Martin Dropkin, Fidelity’s head of Asian fixed income, recommends emerging market and Asia bonds, including China government bonds which offer higher yields (3% for the 10-year benchmark), benefit from low correlations with other fixed income categories and should be boosted by further index inclusion.
Alternatively, investors could find income through foreign exchange exposure (for instance, exposure to emerging markets with higher interest rates), or by focusing on absolute bond returns rather than just income yield.
