As the U.S. and Eurozone struggles with another wave of the virus China is on the road to recovery and this will create long-term investment opportunities
In the Chinese zodiac, 2021 will be the year of the Ox or bull, and this is a good omen for The Asia Pacific region as China looks set to lead the world economy next year and reawaken the Asian tiger.
The region has been under the same stress and turmoil as other regions due to the coronavirus but there are still going to be winners and losers in 2021.
The real green shoot of recovery is in the recovery of the region’s largest economy, China. After seeing its GDP drop -6.8% in Q1, the country has returned 3.2% and 4.9% in the subsequent quarters and already the economy is growing close to the 6% rate it was running at before the virus struck. As with the country’s growth story over the last two decades, this prosperity has the potential to lift other nations in the region and see the Asian tiger reawakened.
Outside of India, you have to look far down the list of nations seeing a second wave to find Japan, with only 500 cases on October 26th and this is in stark contrast to Europe, where France alone saw 52,000 cases in the prior weekend. It’s clear from these figures and the resulting lockdowns in Europe that the Asia-Pac region could be one of the bright spots for economic growth in 2021 and beyond.
The IMF has projected that economic activity is expected to contract by −2.2 percent in 2020, and to see growth of 6.9 percent in 2021. This is higher than the forecast growth rate of 5.2% for global growth, however, that was before the recent virus surge and Asia-Pac could outperform other regions based on the current events.
Government debt is another area where Asia has an advantage over the West and China will do what it takes to support the country with stimulus in order to solidify the recovery, while other developed nations could struggle with their budgets and credit ratings.
The end of October sees the Chinese Communist Party meet to craft their latest 5-yr economic plan and this will likely be heavily influenced by the trade war between the U.S. and China. President Xi Jinping remarked earlier in the month that the country will pursue policies related to domestic self-sufficiency. This is a hint that the country wants to further reduce its reliance on hostile foreign nations and the strategy will open up opportunities for countries in the Asia-Pac region to support China’s goals with labor and manufacturing.
The U.S. election will also go a long way to determine the level of domestic focus as both candidates have differing views and negotiation styles when it comes to trading partners.
Businesses Must Be Diligent About Their Business Plans and Goals
For businesses, there needs to be an honest appraisal of business plans in order to not chase yesterday’s strategies. Sectors such as the airline industry and hotels may continue to see problems and there will be winners and losers in exports. Lower demand from the west has seen investment flows curtailed and this has affected nations such as Indonesia, which relies on commodity exports such as palm oil, iron and coal.
Central bank stimulus and monetary goals will go a long way to decide whether we can see a rebound in physical commodities and foreign direct investment globally. Social cohesion has also been flagged as a potential headwind in affected countries and the recent unrest in Thailand is an indicator of this. This will be more pronounced in nations that had inequality issues prior to the virus and policymakers will need to tackle this before the creative destruction of robotics and technology goes further.
Thailand will continue to see struggles in its travel and hospitality sectors and it may take time for activity to resume. Investors will need to which areas will rebound first in what will be a multi-speed recovery. Hong Kong’s economy was already struggling before the virus hit and investment opportunities will emerge once the situation in the country stabilizes.
The coronavirus lockdowns have accelerated the adoption of online technology and banking, while we also see greater uses of online technology to deliver things such as education. These technologies have also proven to be somewhat recession-proof in certain events and this will likely lead to stronger appetite for digital investment, especially as China continues down the road of a digital Yuan, with the U.S. and Europe now seeking to follow suit. Investment in telecommunications will also have to grow to meet the demand for this technological adoption.
Australia and New Zealand Should Bounce Back When They Finally Open Up
Australia and New Zealand have struggled with the effects of virus lockdowns, including the closure of its business travel and tourism but both should bounce back once they open up again.
In the period of June to August, for example, China’s iron ore imports have climbed 20% year-on-year, with August imports the third highest on record. This is another sign that China’s rebound will lead to a rebound in the areas that have supported the Asia-Pac region. Chinese prosperity should also lead to a return of students and tourism into Australia.
Long-Term Investment Focus Will Outweigh Gloomy Data and Sentiment
In the early stages any improvements and recovery may look small in comparison to recent years and the economic data and sentiment may look underwhelming. This will be related to the deflationary destruction of consumers and the struggles in particular industries.
Despite this, the long-term investment picture will still be promising for the Asia-Pac region and the region could outperform the rest of the world on a ten-year horizon. In the current climate there will be many industries and companies that are trading at low valuations and investors should be planning for a world that moves beyond the virus and in the Chinese year of the bull, sees the country gaining further ground on Europe and the U.S. as the world’s dominant economy.