Update as at 9th April 2020
Asia: well prepared and well positioned
After one of the most volatile months in the history of global markets, a period of relative calm returned ahead of the Easter break, providing a good opportunity for investors to consider what comes next.
With the US yet to see a peak in cases identified and India barely starting its COVID-19 journey, it is too early to declare victory over the virus, so we expect markets to remain volatile over the coming months.
China normally smooths the impact of a wandering lunar New Year by releasing combined January and February data, but this year the process will also include March. When first-quarter statistics do appear, the picture they will paint will not be pretty (even if they look more positive than expectations). This is likely to trigger fresh market volatility, opening yet more opportunities for those who can think clearly.
As 99.9% of populations in all countries have not had the virus, exiting lockdowns will need either confirmation that it has passed/mutated, or a reliable vaccine, if this whole exercise is not to return next flu season.
When this happens, stimulus programmes can be wound down and the world can return to work. But what work? Millions will need to find new jobs. Online working will cast doubt over the need for large offices in future and what of the High Street/shopping mall or bank branches in a world of online payments?
Asia already has the answer to many of these questions, with long-established companies (not just Huawei) manufacturing the tools for the world’s datacentres, ultra-fast broadband and electronic payments. Vast infrastructure programmes are well under way rolling out 5G and Asia is ready to leap ahead.
The virus has brought globalisation into question, but as companies seek to diversify locations to avoid a similar risk in the future, proximity to the giant import markets of China, India and ASEAN, home to more than half the world’s population, will be paramount.
The West has been shocked by forced lockdowns and the instant evaporation of civil liberties, but it looks probable that authoritarianism will continue to rise, whether in the name of health or something else. In Asia, governments have always exercised a far greater degree of control, so both corporates and individuals understand how best to prosper within that framework – and still pay dividends.
Investors are rightly concerned about ballooning global debt. Lockdowns are forcing out capacity and cutting capital expenditure, seeding future inflation, despite the size of the current demand shock. More corporate defaults and government bond issuance seem inevitable in the West, but with state assets to divest, Asia can choose how to refill its fiscal coffers.
Marlborough Asian Equities team
Update as at 19th March 2020
Feet on the ground
Marlborough’s Asian Equities team can count at least a dozen major crises that we have seen over our careers. I personally learnt the art of staying calm in the crash of 1987 and it has served me well through many times since then. When markets have fallen in this fashion, the stocks we have carefully bought while others panicked have often rewarded us with years of strong performance thereafter.
Markets can move very rapidly when fear takes hold and it is vital to ensure that you are acting on accurate information, not just gut instinct, if you want to reap the full benefits over the longer term. Talking to a raft of companies in Asia this week and last, we have found the corporate mood on the ground is better than portrayed in the mainstream media (and much better than on social media). In South Korea, most of the companies we have spoken to this week have seen little impact from the virus to date – none so far have had any of their many thousands of employees catch the new virus and all have been working as normal. Taiwan is barely impacted and very calm. Over in China, at the epicentre of the original outbreak, workers are returning to their factories, while offices and life are returning to (something like) normal. Some companies, whose share prices have fallen more than 30% in the last few weeks, tell us that they are seeing a sales impact from the virus shutdowns in mid-to-high-single-digit percentages, while others are actively benefiting. The fall in oil prices has been dramatic, but is of tremendous benefit to consumers, especially in resource-scarce Asia.
This time round, the speed and depth of the falls do seem remarkable, but they are not without precedent. With that experience in mind and given the breadth of the Asian market, although volatility does feel exceptional at present (albeit that it has occasionally been worse in previous crises), it is creating some very interesting opportunities to buy companies, based on a longer-term view. It is worth noting, too, that rallies from these types of events can be exceptionally sharp and often surprisingly long-lasting, which can be dangerous if one is only holding cash or ultra-defensive stocks.
We expect markets to stabilise when it becomes clear that the peak of the outbreak has passed without the large-scale loss of life now projected by some. Asian markets have become substantially more liquid in the last ten years and we do not anticipate similar problems in Asian funds to those seen in open-ended property funds. Indeed, as we prefer to hold companies with well-capitalised balance sheets and fundamentally strong business prospects, we have never experienced and do not anticipate any liquidity issues.
So, with a well-diversified portfolio and a comfortable cash position, we will keep checking reality and investing with our feet on the ground and eyes on the horizon.
Marlborough Asian Equities team
Capital is at risk. This is not advice. The value and income from investments can go down as well as up and are not guaranteed. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.
Issued by Marlborough Fund Managers Ltd, authorised and regulated by the Financial Conduct Authority (reference number 141660). Registered office: Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP. Registered in England No. 02061177.