Asia ascending

The disruption caused by COVID-19 is prompting investors and asset managers to reassess how geopolitical forces are reshaping their portfolios. Increasingly, attention is being paid to how each country has responded to the health emergency, and whether the various national policies are nurturing or hurting growth prospects.

While Asia’s economic momentum and demographic features should position the region as a prime starting point for global investors, this typically has not been the case. However, Asia’s path to recovery amid the coronavirus outbreak is shedding new light on the region’s markets and their growth potential.

Fidelity International analysis shows that Asia’s journey out of the current downturn will be shorter and sharper, compared to those of the United States and Europe. There are parts of Asia where we can confidently talk about a V-shaped recovery such as China and South Korea.

Seismic shifts

Asia, excluding the Indian subcontinent, has experienced a relatively modest impact from COVID-19. Experts point to several factors behind the containment of the virus: lessons learned from the SARS epidemic, such as use of face masks and temperature screenings at airports; thorough track and trace measures; general respect for institutions and high levels of compliance; and deeply ingrained collective values.[1]

Consequently, Asian governments are set to intensify regional integration. Projects like China’s Belt and Road Initiative and the ASEAN partnership have created frameworks for an “interconnected and interdependent system”, which will be strengthened as countries open up and establish intra-Asia travel bubbles.

Another common trend across Asia is the population’s affinity for innovation and technology. The digital transformation of banking, logistics, retail and communications has boosted the development of enterprises operating in the virtual space. Consider Singapore’s Smart Nation plan – the city-state aims to leverage technological solutions, including data analytics, to enhance urban living, transport and public services.[2]

For Fidelity, Asia’s renewed commitment to sustainability is also worth noting. The pandemic is encouraging bold pledges around the environment and social concerns as governments strive to build back their economies. Just last month, Japan and South Korea vowed to make their countries carbon-neutral by 2050, while in September China promised to achieve carbon neutrality by 2060.[3]

Investment bright spots

These shifts bode well for investment opportunities. In aggregate, Asian equity markets have proven to be resilient over the course of 2020. This is a real differentiation from previous instances, where we’ve seen either a major economic shock or an air pocket in financial markets. Historically, Asia has been a geared play on the downside, but this period of crisis represents a meaningful break from the past.

With regards to fixed income securities, Fidelity International research suggests mainland Chinese bonds, in particular, have room for substantial growth over the next decade. It’s a phenomenon that we’re calling ‘the hidden dragon of 2020’ – the scope for accelerated foreign inflows into the China onshore bond market.

Potential for substantial growth ahead

Size of China’s onshore bond market

The key reasons for these inflows are Beijing’s ability to quickly curb the spread of the virus, the gradual inclusion of Chinese bonds in global fixed income benchmarks, and strong demand for portfolio diversification. Since China has not undertaken the same level of monetary stimulus as the US and Europe, it embodies “a normally functioning bond market that offers both attractive yield and diversification.”

To sum up, the evolving geopolitical landscape – brought on in part by COVID-19 – should spur investors and asset managers to review their priorities and focus on Asia’s economic strategies to avoid missing out on long-term value and returns.