15 Dec 2020
29 October 2020 | William Lam, Co-Head of the Asia & Emerging Markets Equity team in Invesco.
Further information: View the Fund factsheets Invesco Asian Fund (UK)
Thailand has been held up as a model of a country that has dealt well with the virus. It has only recorded 59 deaths from Covid-19 and there have been no domestic infections since June (the only cases since then have been people coming into the country). Other countries in the region have also performed well: Singapore and Hong Kong have only recorded a total of 132 deaths between them. You might think that these countries have been able to a large extent to get ‘back to normal’, and that stocks which initially were sold off heavily would have rebounded back to where they started the year.
However, while the pan-Asian stock market indices are trading a little above where they started the year, the benchmarks for Thailand, Hong Kong and Singapore are still way off their pre-Covid levels. The MSCI Singapore index, for example, looks much more like an ‘L’ shape than the ‘V’ shape we have seen in certain other markets around the world.
There are probably several reasons for this but perhaps the main one is that these economies depend heavily on international travel. For example, ComfortDelGro in Singapore has traditionally been thought of as a classic domestic, defensive stock – it runs buses, taxi and metro services. Despite Covid-19 case numbers being extremely low (running at an average of 10 per day in the last week), travel in Singapore has not returned to normal levels. Partly this is because people still seem fearful of travel in close proximity to others (despite the likelihood of fellow travellers having the virus being effectively zero), but partly it is also because millions of travellers pass through Singapore each year (around 3x the population) and they would normally be big users of the transport system. So now ComfortDelGro is a stock that is not at all defensive but rather it is very much a ‘re-opening play’, like so many other stocks around the region.
KBank in Thailand is another great example. This is an extremely conservative bank – alongside its rival Bangkok Bank, it is probably the most conservative bank we know in Asia, with what we believed was a very over-capitalised balance sheet. However, running a bank conservatively does not help that much when you operate in an economy where approximately 8m jobs in a labour force of 37m are supported by tourism, and the government is not allowing any tourists into the country.
A question we are grappling with is what will be the trigger to allow countries such as Thailand to open up to foreign visitors? The fact that the country has managed the virus so well to date means that any opening up is a clear risk to that clean bill of health. When we read that in the UK, for example, the plan is to roll out the vaccine only to half the population (when it is the other half of the population who are more likely to visit Thailand!) makes us worry that even when there is a vaccine the Thai government might be cautious in opening up. Getting back to normal could take time, in our view.
This discussion is intended to provide some context as to the positioning of the Asian strategy at the moment. Throughout the crisis we have held a ‘barbell’ portfolio, roughly in a 50:50 split between tech and internet on the one side and ‘Covid sensitive cyclicals’ on the other. We are probably now at a 45:55 split, but we have reached a point where we are reluctant to tilt the strategy much further in that direction. There are a large number of stocks trading at a discount to where they have traded at historically, such as KBank and ComfortDelGro, all of which are basically ‘re-opening plays’; we are very happy owning stocks like this but we are mindful not to make what is essentially the same bet across a huge swathe of the portfolio.
Importantly , we are also finding that there are stocks trading at a discount to their historical valuation levels in areas which are less Covid-sensitive; the current largest overweight position in the strategy, Asustek Computer, is one of these stocks and yet it is a technology stock which benefits from the trend to work and study at home.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
As a large portion of the strategy is invested in less developed countries, you should be prepared to accept significantly large fluctuations in value.
Important information
All data is as at 18.10.2020 and sourced from Invesco unless otherwise stated.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.