2Q 2022 Asia Equity Outlook: Treading a rocky road

Treading a rocky road

Portfolio Manager Jin Zhang discusses China’s real estate, consumer and industrials sectors, as well as supply chain disruptions in semiconductors. asia

• China’s zero-tolerance COVID policy has worked relatively well for a large country with very densely populated cities. While the response may seem draconian for the Omicron variant, the approach continues to work by and large and the situation in Shanghai should ease within weeks. Should China succeed with increasing vaccinations among older people, we may also see a gradual loosening of its stance.
• Real estate is among the most challenging sectors of the Chinese economy. Prices are high and real estate companies have a lot of leverage. The regulatory approach is to manage the most aggressive players, de-risk the sector, protect banks and insulate the rest of the economy. Nonetheless, investors should be very cautious about involvement in the sector.
• China is a very diverse market and there are many industries that are insulated from the real estate sector, such as consumer companies with entrenched market positions and pricing power, and industrials companies that have been gaining market share both domestically and internationally.
• Following the Ukraine invasion, there is greater international attention on Taiwan. The Taiwanese economy is four times the size of Ukraine and more connected to the world economically, especially in semiconductors. That sensitivity will act as a deterrent for dramatic action by China. However, it is important to recognize the potential impact of geopolitical risks on economies, as well as companies’ supply chains and operations.
• India’s currency is likely to come under pressure due to its reliance on oil imports, even though there are many businesses in India that can benefit from a weaker currency. It will pay to be selective in India as higher inflation impacts the lower income population. Exposure to market leaders focused on premium products, IT service businesses that benefit from a weaker rupee, quality banks with lower credit costs, and low-cost refiners should hold up well. In India and Indonesia, banks can benefit from higher net interest margins and lower credit costs and economies are in an early-stage recovery.
• Russia and Ukraine are important suppliers of neon and palladium used in semiconductors. The longer the conflict persists, the more likely the disruption to supply, although there are alternative materials the industry can use. It is important to continue to monitor supply situations at a micro level to assess whether companies are equipped and able to navigate them.

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