A quick look back on how markets performed for the first half of 2021 shows the US market outperforming the rest, with the S&P 500 rallying more than 14% and the tech-heavy Nasdaq index up 12.5% at the time of writing. These gains were supported by the strong earnings growth that exceeded expectations by the majority of the companies, coupled with the massive stimulus and high vaccination rate in the US.
Back home, the FBM KLCI was Asia-Pacific’s worst-performing market in the first half of 2021, falling 5.81%. The losses came as we continued to battle a resurgence of Covid-19 infections while the vaccination rate of the population remains relatively low. The extended lockdown came with a hefty price tag, with the World Bank slashing Malaysia’s GDP forecast for the second time now, to 4.5%.
Asia has been plagued by a resurgence of the virus, relinquishing the hard-won gains at the end of 2020. At that time, the US (still led by president Donald Trump) and Europe accounted for 73% of daily Covid-19 infections globally, with a mortality rate of 70%. In 2021, the tables have turned, with Asia making up 80% of global daily infections, with a mortality rate of 90%. Which leads us to the containment measures that governments have reintroduced in a bid to stop the virus’ rampage. This contrasts with the reopening of the economies in the US, Europe and the UK, which have run very successful vaccination campaigns covering almost 50% (or more) of their respective populations.
The unforgiving lockdown measures have investors questioning the sustainability of the earnings recovery in the region, as sales slow and operations are constricted by the lockdown policies. Positive earnings growth estimates from late last year seem to be out of reach for the region. And this is a key reason Asia gave up its gains of 13.6% from early in the year, tumbling to a meagre 5.3% as analysts and investors start to price in a tougher operating environment, with a delayed recovery. Despite this assessment, we are still holding on to our interest in the region for several reasons.
First, the reopening of the US, UK and European economies have strongly resonated with risk assets and we expect Asia to mirror such a performance once we get to the reopening stage. Depressed gains right now compared with developed markets represent an opportunity to engage the market while it is being held back by virus-related hurdles.
Exports have been holding up as well, with most Asian countries recording high double-digit growth in export value. At a glance, most people would attribute this to the low base effect, as we did too initially, but looking through Malaysia’s exports numbers and comparing the latest figures to a pre-pandemic year (2019), we are able to ascertain that Malaysia recorded a 24% increase in exports to the rest of the world in April 2021. While this contrasts with the 63% year-on-year growth, it presents a more accurate picture of the state of the export sector. Interestingly, Malaysia’s exports to China and the US rose 33.8% and 57.4% year on year respectively in April 2021, an indicator that external demand is strong. And we anticipate a similar positive trend with other Asian nations.
And lastly, we do see governments ramping up efforts to vaccinate their populations and while the hope is that the pace can be further hastened, it is encouraging that Asian governments are taking a more proactive approach with vaccination compared with the hesitancy in late 2020, when they prematurely relaxed restrictions, riding on the back of their early wins in containing the outbreak.
The challenges we are seeing in Asia are a temporary hurdle and not a permanent shift in economic fundamentals. There will be scars from the pandemic, especially as economies deal with the compounded pain of rolling lockdowns since 2020, but this will only serve to delay the recovery. The Asean-4 economies (Malaysia, Indonesia, the Philippines and Thailand) are collectively set to expand GDP by 4.4% this year, with a stronger 6.4% rebound in 2022.
For these reasons, we remain invested in Asia, taking a long-term view. Investors too should take advantage of the reopening of developed-market economies by having exposure in these regions. Long-term structural themes such as net zero emissions policies, disruption and innovation in the post-pandemic era will drive consumer demand and growth of industries into the future.
Michael Lai is vice-president of wealth management research at OCBC Bank (Malaysia) Bhd