China – and the rest of the Asia Pacific region – could provide the West with some indication of what is to come as lockdowns are loosened and commerce is gradually rebooted. And investors around the world no doubt will also be watching what comes out of the National People’s Congress’ annual session taking place on the 22th of May, delayed by two months because of covid-19. However, whilst fiscal and monetary policies continue to play a crucial role in how this pandemic unfolds, one thing the past month has shown is that sectors, regions and countries are reacting and performing differently. A lot of that boils down to the varied cultures, supply chains and economic structures, including the datasets each country uses.
China has the potential to lead and support Asia Pacific’s recovery by resuming connectivity in trade and investment with other countries in the region, according to the ASEAN+3 Macroeconomic Research Office (AMRO). Toshinori Doi, AMRO’s director, recently stated that “this trajectory depends largely on how effectively the regional and global economies can contain the virus”. Asian governments in general have been applauded for their handling of the covid-19 outbreak compared to the West, with Hong Kong remarkably reporting only four deaths since the onset.
Even so, one of the most important factors for economic recovery globally will be consumerism and we are already beginning to see how the pandemic has changed behaviour in this respect, as countries try to get back to business. A survey in mid-April by McKinsey found that 40% of Chinese consumers said they’d be more careful about spending money, with only 13% of respondents saying they were primed to go shopping. Interestingly, while economic data for April showed signs of recovery on the supply side, retail sales were down 7.5% year-on-year and lower than in January and February when the lockdowns started. Consumers are bound to refrain from big ticket spending, such as new houses and holidays and with many facing the prospect of job losses or salary cuts, they are also understandably more frugal on some essentials.
But this is not your typical recession and there will be nuances to the recoveries. It was interesting to see how Shanghai’s government recently helped boost sales for local retailers, for example, by coming up with a new shopping festival of one-off discounts and extended store opening times. Also, while the auto sector struggled elsewhere in the world, car sales in Wuhan, the epicentre of the covid-19 outbreak, experienced a boom in April as residents avoided public transport in fear of a second wave.
Another factor that complicates the recovery process is the changing dynamic in international relations and, as we have seen, trade relations between the US and China have anything but improved since the outbreak. For example, some financial analysts are worried about Tesla’s long-term future in China given the geopolitics. Tesla also has local EV start-ups to contend with. None are immediate challengers yet, with NIO ranking ninth, WM Motors 12th and XPENG just outside the top 20 for March sales. However, XPENG’s second model, the P7, will try to compete with Tesla head on. The Guangzhou-based company says that this is because its newest offering will have a longer range than the Model 3 and be priced more competitively.
Some technology companies have also made headlines in this regard. Earlier this month, Taiwan Semiconductor Manufacturing Corporation (TSMC), one of our Asia Pacific & Far East portfolios’ biggest holdings, announced that it intends to invest US$12 bn in the US state of Arizona to develop one of the most state-of-the-art nanometer semiconductor fabrication foundries in the world. Apple also announced plans to diversify its regional manufacturing operations outside of China in 2021 by setting up a factory in Vietnam for producing millions of AirPods.
Technology has proved to be a positive play before and during the covid-19 crisis. However, globally there will be a mix of stories within in it in terms of attractive valuations and sustainability. Tencent, another large and long-standing holding in our Asia Pacific & Far East portfolios, made a 26% increase in net revenues for Q1 2020, and its thriving online gaming platform helped its stock erase March losses to rise 11% this year. Active asset allocation becomes extra important in uncertain times like these, and picking the best of the best will be the way to reaping returns in equities.
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CLI01629 Expiry 30/04/2021