Economic recovery in Asia will continue to strengthen this year, after Asia ex-Japan became the best performing region in global equity markets through 2020, according to Nomura Asset Management.
Min Feng, senior investment specialist, Nomura Asset Management, said the region’s ability to contain the pandemic faster and better than many other regions was a considerable factor in its economic recovery, particularly in China and North Asia.
Feng says: “Going into 2021, we remain positive on Asia and see several reasons why its equity markets should continue to outperform developed markets. Firstly, we believe the region’s economic recovery will strengthen next year. There are smaller countries in the region that were not as efficient as their larger neighbours in containing the pandemic, however these countries should begin to move into a swifter recovery phase next year thanks to the rollout of vaccines. It is worth noting too that Asian companies have been revisiting and raising their earnings forecasts since the middle of 2020.
“The second main driver of expected outperformance is based on our assumption that monetary and fiscal policies will stay accommodative and the associated liquidity will support equity markets. Additionally, there is a broad consensus that the key US interest rate will be kept near zero until 2023.”
Feng notes that the outlook for the US dollar has also weakened, with history suggesting that a weaker dollar has a positive impact on the performance of Asian equities against developed markets.
In addition, the valuations of Asian equities remain more attractive than those of their developed market peers, particularly US equities.
Nevertheless, Feng cautions that the region could encounter headwinds in the form of a slower-than-expected vaccine rollout programme and the effects of widespread quantitative easing programmes which could cause a potential rise in inflation and stronger than expected US dollar.
Feng adds: “As the New Year dawns, Asia looks to be in a stronger position than many. We are looking forward to seeing how the year unfolds – but staying vigilant to any more surprises that may arise.”
However, deVere CEO Nigel Green warned that investors should not overlook the importance of global diversification in their rush to “pile into Chinese equities” in 2021.
His warning comes as China’s benchmark index CSI 300 rose 2% at the start of the New Year, following a 27% gain in 2020.
Green says: “This trend of piling into Chinese stocks can be expected to continue throughout 2021 as investors seek growth. China’s rebound is quite remarkable, compared to other major economies, many of which are once again rolling out stricter restrictions to stop the spread of Covid amid a tsunami of new cases.
“But as 2020 showed us with perhaps too much clarity, things can change quickly and so-called ‘certainties’ can shift overnight. Therefore, as ever, it is essential that investors have a truly diversified portfolio. This includes across geographical regions, assets classes, sectors and currencies.”
He adds: “China, but also Asia in general, has massive potential and will likely outperform the rest of the world in 2021. However, investors must not get giddy and forget about the importance of diversification – the investor’s best tool to capitalise on opportunities and mitigate risks.”
