The coronavirus has had a massive impact on stock markets worldwide, which in the last quarter saw the biggest quarterly decline since the fourth quarter of 2008. The MSCI AC World Index was down by 21.7% last quarter. The MSCI AC Asia-Pacific countries ex-Japan Index marginally outperformed in the last quarter, while the MSCI Emerging Markets Index underperformed. Jefferies analysts (under Asia Asset Allocation section of their report dated April 6) continue to recommend Overweight positions for Asia ex-Japan (excluding Australia) and also for emerging markets, primarily due to dominant weighting of China in these indices.
Asia-Pacific Countries Detailed
As per the analysts, China is the “economy globally with the best possibility of recording positive growth in the coming quarter after a disastrous first quarter.” Detailed below is the analysis of major Asia-Pacific countries (excluding China and Japan) based on their performance in the last quarter, or their performance under coronavirus fear.
Australia and Korea
The MSCI Australia Index dropped by 34.1% in U.S. dollar terms in the first quarter of this year, compared to a drop of 21.1% benchmark MSCI AC Asia Pacific ex-Japan Index. Talking of Australian bank stocks, which account for 24.5% of the MSCI Australia Index and 3.3% of the MSCI AC Asia Pacific ex-Japan benchmark, they lost 37.9% in U.S. dollar terms in the first quarter.
As per Jefferies, such a performance was partly due to a 12.7% drop in the Australian dollar against the U.S. dollar. The Reserve Bank of Australia has slashed the rates to a record low of 0.25%. Further, the analysts note that Australia’s household sector with a debt to disposable-income ratio of 187% is highly leveraged. Also, the analysts say the lockdown and rise in unemployment “creates the biggest risk of a recession in 29 years.”
Talking of Korea, the analysts note that the country marginally underperformed last quarter dropping by about 22.6% in U.S. dollar terms. Prior to the impact of the virus, Korea was maintained as a Neutral last quarter on the belief that the “worst of the external slowdown,” especially with the semiconductor cycle, was over. Also, there were signs that President Moon Jae-in would withdraw market unfriendly policies. Korea seems better than Western countries as it had been able to limit the spread of the coronavirus without locking down economic activity completely.
India and Hong Kong
India underperformed in the first quarter, dropping by 31.5% in U.S. dollar terms. The number of positive coronavirus cases continues to rise in the country. The government has already announced a lockdown in the country. As per the analysts, this aggravates fear that the “long festering problems” with the country’s banking sector could get worse due to the “problems in consumer loans.”
“India’s longstanding Overweight continued to be reduced last quarter to only a slight Overweight as the stock market reacted negatively to accumulating evidence of a dramatic slowdown in growth,” the analysts note. The Indian rupee has also depreciated by about 5.5% against the U.S. dollar.
Moreover, despite announcing the cut in the corporate tax rate last September, significant earnings downgrades could be seen, the analysts say. Consensus earnings growth forecasts (MSCI India Index), which was 24% at the start of the calendar year is now down to 21% for the FY21 beginning April 1, 2020.
Next in the list of Asia-Pacific countries is Hong Kong, which was undergoing political unrest prior to coronavirus outbreak. MSCI Hong Kong, which dropped by about 17.8% in U.S. dollar terms, outperformed last quarter. As per the analysts, “an issue for the market is the extent to which high dividend payouts are maintained amidst the dramatic slowdown in the economy, with a complete ban on incoming arrivals imposed since late March.” The earnings growth forecasts for the country for year 2020 has been slashed to 6% from 6.6% at the start of the year.
Thailand and Malaysia
Thailand witnessed a drop of 34.3% in U.S. dollar terms in the last quarter. The pain points for the economy even before the outbreak were continued earnings downgrades due to slow growth and dropping domestic mutual fund buying. Thailand also resorted to lockdown, including closing the country to tourists since March 25.
Thai baht lost value in the last quarter as well. The local currency lost 8.6% value against the U.S. dollar compared to an 8.6% appreciation against the U.S. dollar in 2019. For the last quarter, the country was maintained as an Underweight.
Malaysia, which was an Underweight last quarter, was among the worst performer last year. However, it marginally outperformed dropping by about 20.4% in U.S. dollar terms in the last quarter. As per the Jefferies analysts, the positives for the country are a relatively cheap currency and a current account surplus.
On the other hand, negatives include earnings downgrades, slowing growth concerns and a weakening property market. In addition to these, the new negative points for the country are the impact of the coronavirus and drop in the oil price. Further, the analysts note that the earnings have now been downgraded for eight consecutive quarters.
Singapore and Indonesia
Singapore underperformed last quarter, dropping by about 28.3% in U.S. dollar terms. A major factor affecting the demand is the “continuing property tightening.” On the other hand, a positive for the domestic demand is the “capital flight from Hong Kong,” the analysts note (under Asia Asset Allocation section of their report).
Singapore has been handling the outbreak well and so far has refrained from a lockdown in activity. However, the virus has thwarted the recovery efforts from last year’s external downturn. The Singapore dollar has depreciated about 5.4% against the U.S. dollar. Towards the end of the last quarter, the country announced the biggest fiscal stimulus ever, representing about 11% of the GDP. Earnings growth forecast for the year has been dropped from 5% at the start of the year to 6% earnings decline now.
Next in the list of Asia-Pacific countries is Indonesia. The MSCI Indonesia underperformed last quarter dropping by about 40.2% in U.S. dollar terms. The country was moved from Overweight to Neutral during last quarter. However, there has not been any evidence (even before the outbreak) of cyclical recovery despite 150bp of rate cuts since July 2019. In the last quarter, the rupiah lost about 15% value against the U.S. dollar. For 2020, the earnings growth forecasts for Indonesia have been slashed to 5.4% from 11.3% at the start of this year.