Vaccine breakthrough boosts investor confidence in Asia
This week’s positive news about a successful new Covid-19 vaccine has prompted investment teams at the region’s big institutions to consider more closely what the post-pandemic world will look like.
Global pharmaceutical firm Pfizer made headlines on November 10 with news that its phase 3 coronavirus vaccine is shown to be more than 90% effective. The US company has said the vaccine will be ready for wide distribution as early as next month, although manufacturing and logistical limitations mean that most people across the world would not receive it for many months.
Despite this, the news has strengthened investors’ confidence in Asia’s economic recovery prospects.
"On a relative basis we were bullish and overweight Asia - and Japan - before the pandemic and we still are," John Pearce, chief investment officer at Melbourne-based UniSuper, told AsianInvestor.
David Chao, global market strategist for Asia ex-Japan at Invesco, offered a more guarded assessment.
“Investors should be aware that the vaccine news flow over the next few weeks won’t be entirely positive. Operational challenges remain about the availability of doses, possible distribution in emerging markets and whether the broad public in developed markets will take the vaccine.”
Countries that have not entirely contained the virus, or those whose economies depend heavily on tourism, will benefit most, said Chao.
He expects an effective Covid-19 vaccine will lead to stronger corporate earnings and a possible return to 'normalised' markets a year from now.
"In the near-term, it’s possible that North Asian equities may underperform their peers, as their economies benefit less from a vaccine, due to successful containment policies.”
IRREVOCABLE CHANGE
Some investment experts feel that, even if a vaccine becomes widely available, the world and financial markets have been irrevocably changed by the pandemic.
"There’s going to be a hangover. The world’s going to look different because the public sector’s going to be more indebted and rates are going to continue to be lower for longer, NZ Super’s chief economist Mike Frith told AsianInvestor.
He added that the pandemic has also sped up certain development trends, such as the idea of infrastructure data centres and new communications technology, driven by a sudden escalation of working from home and online shopping.
"Potentially there as been a step change in their evolution," Frith said, pointing to the impact on transportation, toll roads, rail, freight, that were hit badly in the first Covid sell off.
Infrastructure investment, seen as a solid long term bet, providing reliable income streams, "has been given a bit of a shake-up," he added.
"No one in the infrastructure world 12 months ago considered a model where airports would be closed for three years. Or the possibility that oil prices go negative."
Both NZ Super, which has $28.8 billion in assets at the end of June, and Australia's Future Fund, with $150 billion, sold out major airport investments over the last year, thus avoiding the global recession in air travel.
The trend for 'deglobalisation', where companies seek to localise their supply chains domestically, is expected to accelerate, in some places at least. The most dramatic examples will be seen in China.
Deglobalisation in the context of China means economic policy will increasingly be driven by domestic brands in technological and financial innovation, industrial consolidation, biotechnology and consumer-upgrading, within the backdrop of a prolonged Sino-US tech war.
"Beijing’s long-term policy and growth aspirations have not been dented by the pandemic," Chi Lo, senior strategist for Greater China at BNP Paribas Asset Management in Hong Kong, told AsianInvestor.
"We should be seeing a different growth model emerging in China. The old China model of debt-financed investment-driven growth is gone for good in the post Covid-19 world."
OUT-OF FAVOUR OPPORTUNITIES
NZ Super believes the pandemic offers investors and governments an opportunity to pivot towards the environmental, social and governance (ESG) investing space. "In particular, the alternative energy environment and conscious consumerism," said Frith.
"These issues are very important in Europe and there’s a lot of money for those sorts of investments. So if a government can line up an infrastructure requirement with future demand and private sector money, then there’s something really meaningful on offer there."
Because there’s still a degree of uncertainty out there about where things are going, there are discounts on offer in things like the transportation, tourism and hotel sectors
In the last six months, NZ Super has done particularly well from its strategic tilting strategy, in which it actively goes against market sentiment and buys into areas that are out of favour.
"Because there’s still a degree of uncertainty out there about where things are going, there are discounts on offer in things like the transportation, tourism and hotel sectors," said Frith.
However, he cautions that although prices have come off, "it’s not clear that there are distressed sellers out there. And when I look across at real asset baskets such as infrastructure and real estate, we still think many of those are fair value".
"We have some distressed credit mandates and those guys are giving some money away. So there is some pressure, but at the moment the real asset basket is not offering real opportunities."