The MSCI Asia ex-Japan Index has a negative return of 7.19% year-to-date, compared with an 18.52% rise for the full year of 2019, according to FE Fundinfo.
The 2020 plunge is obviously related to the spread of the coronavirus, which has impacted supply chains as well as general economic activity. Yet Mark Haefele, chief investment officer for UBS Global Wealth Management, wrote in a recent client note that he sees a turning point.
“We remain optimistic on Asian equities over the next three-to-six months as the growth recovery has been delayed, but not derailed,” Haefele said.
“The coronavirus’ negative impact on full year Asia ex-Japan earnings is likely to be temporary and economic growth is likely to recover in the second quarter as supportive policies bear fruit,” he added.
In the very near term, there may be some market volatility, but as the number of daily confirmed new cases declines, economic activity will likely return to normal, according to Haefele.
He expects recovery to begin by the end of the first quarter.
The CIO said that past experience with the SARS outbreak suggests that equity markets will likely start to recover when the rate of new cases falls while potential government stimulus measures and structural drivers like 5G spending should still drive double-digit earnings growth for the region in 2020.
“With [Asia company] earnings growth for 2020 likely to be about 12% [in US dollars], we expect more upside for MSCI Asia ex-Japan stocks than for high grade bonds,” Haefele added.
Other asset managers that favour Asia ex-Japan equities include Invesco. David Chao, Invesco’s global market strategist for Asia ex-Japan, said earlier that the valuations are more attractive than the US, pointing out that there seems to be a “disconnect, especially between the US and emerging Asia”.
Moreover, Chao believes that investors are already “seeing past the coronavrius” and its temporary impact on economic activity.
Performance of three Asia Pacific-focused equity funds from UBS
| Year-to-date return | 2019 return | 3 years’ cumulative return | |
| UBS Equity Asia Fund | -6.98% | 19.55% | 22.58% |
| UBS Equity Emerging Asia Fund | -6.29% | 26.09% | 29.48% |
| UBS Equity Asian Consumption Fund | -6.28% | 24.02% | 35.04% |
Source: FE Fundinfo. In US dollars.
Online preference
At the same time, UBS WM also expressed preferences as the coronavirus impacts economic activity.
“Concerns about the coronavirus are discouraging travel in the region, and people are staying at home. As a result, we believe companies exposed to online consumption, like gaming, e-commerce and food delivery names, stand to benefit,” according to Haefele.
“We believe quality stocks with resilient earnings and strong cash flows as well as stocks with high dividend yields should be defensive in the current environment,” he added.
Furthermore, Haefele also noted that investors should avoid vulnerable sectors like airlines, casinos, hotels, other travel-related segments and select consumer-related industries given the risk of sharp near-term earnings cuts.
“Among regional markets, we stick to our underweight in Taiwan versus China as Taiwan is very exposed to supply chain disruption due to the virus, and its relative valuation now looks less attractive compared to the Chinese market.
“We keep our overweight on Malaysia versus underweight on Thailand given the Thai tourism industry is among the most exposed to China’s travel restrictions,” Haefele said.
