ESG: Active Stewardship at the Quality Growth Boutique
Brian Bandsma talks about the mixed response to COVID-19 in the Asia Pacific markets, supply chain dynamics, and opportunities for investors.
Central bank action has been a clear driver of the recovery in the Asia Pacific equity markets. Central bankers have shifted their mindset beyond orthodox policy measures, as well as their mandate to control inflation and try to maximize employment. Markets also tend to look at future earnings strength. Based on strong policy action and a fairly strong recovery following the lockdown, we believe that markets are responding appropriately.
More developed countries within the region, including Taiwan and Korea, have been successful in their COVID-19 response. On the other hand, less developed countries like India have struggled as they face a different set of circumstances. Broadly speaking, developing economies don't have the same tools to respond to the crisis. As a result, the developing world will likely face the full brunt of the cost of the outbreak.
It is important to look at the supply chain for each industry separately. While textile manufacturers can relocate rapidly in response to labor costs, their focus will increasingly be on efficiency and automation. For industries like consumer electronics, the supply chain is less defined by specific countries and labor costs, and takes longer and is more costly to move. We think any supply chain shifts are more likely to occur within Asia Pacific, rather than onshoring to the US.
US restrictions on China’s Huawei focus primarily on telecoms equipment, so the government may be more open to Huawei continuing to operate in handsets if it buys chips from US companies like Qualcomm. While Taiwan’s TSMC has lost business supplying chips to Huawei due to the restrictions, its high-spec components mean that it can find other customers to replace that lost trade. Other players will find it hard to match TSMC’s competitive advantage.
Some potential winners from the crisis can be found in the technology space. Many companies are still going to need more investment to maintain the stability and robustness of the enterprise IT infrastructure as employees work from home. And from a consumer standpoint, we expect further investment in e-commerce and other technologies that will allow for contactless retailing.
Equity markets are pricing in a fairly strong recovery in earnings. Across companies, it may turn out that in some instances the market was overly optimistic. However, there are opportunities to find high quality companies where the market has underappreciated the earnings power of the business.