2Q 2020 US Equity Outlook: Looking to upgrade portfolios amid turmoil
Brian Bandsma maintains that e-commerce and IT infrastructure will be long-term beneficiaries of the shift to online activity. He discusses Chinese stimulus measures and how India and Indonesia can withstand the crisis.
The coronavirus crisis is impacting confidence and resulting in an intense liquidity event across Asia-Pacific. While the sell-off has been indiscriminate across assets and regions, Chinese equities have remained relatively sanguine during this period.
The longer-term economic outcome depends on the spread of the virus, as well as governments’ and consumers’ response. While investors must be aware of the macro perspective, it is essential to focus on evaluating individual businesses, questioning the long-term impact on their earnings, whether they have the balance sheet to withstand the downturn, and the potential opportunities that may arise.
There are areas that should be positively affected longer term. Transactions and activity previously carried out face-to-face are now increasingly moving online. For example, we see greater adoption of online technology to deliver education services. And, the crisis has provided an impetus for consumers who have been slow to adapt to e-commerce to try on-line services. Platforms that enable this type of activity should see an incremental boost in demand. Finally, many companies that have shifted towards telecommuting have found that their IT infrastructure is not as robust as they expect, and so we may see more investment in that area going forward. On the negative side, countries like Thailand, where travel and hospitality is a significant sector, will suffer. It will take time for activity to resume, and investors should question which areas of the market can return to prior levels.
We expect the Chinese government to supply the necessary stimulus to keep its economy going, regardless of the short-term costs. The country will be impacted by the slowdown in consumption in the developed world, although certain areas – such as the supply of technology components – may see increased demand. It is difficult to assess the impact of the virus on the trade war between the US and China. Previously discussed policy changes in the US may be on the back burner, and the White House may also use the crisis to put further pressure on China.
A significant portion of India’s population will not be able to avoid exposure to the coronavirus. The country has large numbers of homeless, few jobs allow for telecommuting, and many people lack the savings needed to enable them to stay at home. As a country, India has a high dependency on foreign direct investment, which is being withdrawn in the crisis. Dollar-denominated debt also presents a risk. On the plus side, the low oil price should be a positive for businesses and consumers.
The withdrawal of liquidity from Asia-Pacific markets has hit Indonesia materially. As a major commodity exporter – including palm oil, iron and coal – a downturn in demand will also impact the country. Central bank policy and fiscal stimulus in developed markets will be important in determining the extent of the recovery in foreign direct investment flows and whether or not markets like Indonesia and India can normalize.