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UBP: Asian emerging markets under pressure

As a result of weaker growth, low vaccination rates and diverging monetary policies, Asian emerging markets will continue to experience portfolio outflows and sustained depreciatory pressures, according to Union Bancaire Privée (UBP).
Carlos Casanova, UBP

Developed markets in Asia will likely reopen sooner that their emerging market counterparts, given the expected time it will take the latter to reach appropriate levels of immunisation, Carlos Casanova, senior economist for UBP in Asia, said in a new report.

For this reason, growth in 2021 will be led by developed markets with export-oriented production structures. Asian emerging markets with consumption-oriented economies will continue to experience headwinds to growth for longer.

“As a result, emerging markets will continue to experience outflows, leading to sustained depreciatory pressures throughout the remainder of 2021. Meanwhile, developed markets will benefit from economic reopening, likely supporting risk assets in Asia,” Casanova said.

Singapore emerges as a clear bright spot. It was amongst the first in the world to achieve an 80% vaccination rate, thanks to an efficient inoculation programme.

“We expect to continue to observe marked differences in the region in terms of growth, performance and policy support,” added Casanova. “Growth in H2-21 will be led by developed markets with export-oriented production structures. These economies are benefitting from access to vaccines, still loose domestic conditions and sustained external demand.”

Asian emerging marks with consumption-oriented economies have been adversely impacted by a spike in Covid-19, led by India, Indonesia, Thailand and the Philippines. These economies will continue to experience headwinds, as vaccination rates remain low, delaying reopening.

The Geneva-based private wealth manager has revised down its growth projections for Asia to 6.3% in 2021, compared with 6.5% previously. Much of this can be traced back to downward revision to its forecast for China, now 8.2% versus the earlier 8.6%. However, it has also revised downwards its growth forecasts for Indonesia, Malaysia, the Philippines and Thailand.

By contrast, UBP has revised upwards its growth forecasts for Hong Kong, Singapore, South Korea and Taiwan.

Emerging investment potential

As for its investment strategies in China, Casanova told FSA that he continues to see strategic opportunities in the country’s transformation, but added that investors should remain very selective.

“In particular, investors ought to remain cautious in sectors that belong to the ‘new economy’, especially more mature segments where there is a clear over-representation of large private players with significant market shares,” he explained.

Moreover, these companies will be expected to facilitate the long-term structural efforts of the government, suggesting downside pressures on future profit margins and earnings as revenues will have to be set aside for this purpose, he added.

Companies related to core technology and soft consumption will likely benefit from policy support and faster growth under China’s new development model. More specifically, the 14th Five-Year Plan will prioritise core technologies like semiconductors and artificial intelligence (AI), even as authorities pivot away from the traditional consumer-facing technology sectors.

A focus on companies and sectors at an earlier stage of the growth cycle, meanwhile, may make domestically-listed A-share opportunities more attractive for investors looking ahead. 

Part of the Mark Allen Group.