Asian Equity: Adapting to a changing environment
The coronavirus outbreak has created more than just ripples in the global markets and the global economy. With so many countries imposing national lockdowns to fight the virus outbreak, there are bound to be some changes in consumer behavior as people are forced to stay home. Some of these changes have led to new investment opportunities in the Asian equity space. With that said, because we focus on long-term performance and fundamentals with our investment approach, our focus remains largely the same through this recent market turmoil. In evaluating a company’s attractiveness, we have always believed in the significance of a healthy balance sheet, which is more important now than ever – most businesses will need to face a harsher operating environment in the foreseeable future so having the financial resilience to weather the short-term volatility is essential. Even in the midst of a global pandemic, some managements have shown confidence in their companies by announcing share buybacks.
New consumer behavior induced by COVID-19
Amidst the COVID-19 outbreak, we see some new patterns in consumer behavior emerging. People are utilising their digital connections – both audio and video – a lot more to both facilitate communication for work and to catch up with friends. E-commerce has also been more widely adopted as people avoid going out. All these behavioral changes have been feeding into some of our Asian equity portfolio decisions, mainly in the form of new opportunities.
Our large cap strategy has communication services as our top overweight sector. Our exposure in communication services combines telecom companies with social media and gaming companies. The former group benefits from people using more data as a result of the aforesaid behavioural changes while the latter benefits from people spending more time on such activities in the midst of a lockdown.
Fig. 1: Asia region and sector 1Q20 earnings beats vs misses (as of 30 April 2020)
Note: ‘Beat’ is defined as 5% above consensus. ‘Miss’ is defined as 5% below consensus. Green colour represents Beats are more than Misses and Red colour represents Misses are more than Beats. Non-coloured cells represent either in-line results (consensus +-5%) or not-yet-reported results. MT- Materials, IT – Information Technology, EN – Energy, CM – Communication Services, FN – Financials, ID – Industrials, CS – Consumer Staples, CD – Consumer Discretionary, HC – Healthcare, UT – Utilities, RE – Real Estate. Source: Bloomberg, HSBC Global Research, as of 30 April 2020.
Gauging financial resilience in the midst of earnings season
Asia ex Japan 1Q2020 reporting season kicked off in mid-April – something to keep an eye on since it is the first earnings season affected by COVID-19. The economic impact of the virus is strongly dependent on the duration and the severity of COVID-19 and will likely vary across sectors and countries. As a result, there will be a great deal of uncertainty surrounding corporate earnings. Therefore, our Asian equity team, as they always do, is ensuring that companies we hold have the financial resilience in the form of cash buffers and healthy balance sheets to weather the volatility. We take some comfort from the fact that the consolidated balance sheet of corporate Asia is stronger than those in other regions such as Europe and the United States. Also, a debt exposure analysis on our Asian equity portfolios shows that the financial state of our portfolio holdings remains healthy.
Only 285 companies have reported their 1Q2020 earnings so far (out of 1000+ companies) in Asia as of 30 April 2020, so it’s still too early to identify any underlying trends. The preliminary results have been quite mixed, with 53% of the companies having reported either beating or matching expectations. Sector-wise, IT, materials, and financials seemed to fare better (source: HSBC Global Research). Figure 1 above displays the preliminary results across sectors, but the table is subject to change in the coming weeks as more companies report their earnings.
Share buybacks – a positive signal from within
In current times of uncertainty, equity valuations have become fairly low and very cheap lending is available due to longer interest rates lowering. As a result, we are seeing share buybacks across Asia, as with a few key holdings that we are highly overweight on in our Asian equity portfolios. These companies, with solid fundamentals and healthy balance sheets, are buying back shares to show their commitment to increasing shareholder value – usually a signal that a company views itself as being undervalued. One example of such holdings is a leading Indonesian telecom company that announced to buyback up to 20% of paid up capital, as of 30 March. It has lost about half of its market value (in USD terms) year-to-date, despite having positive operating performance and a healthy balance sheet.
Fig. 2: Share Price Chart – Indonesian Telecom Company
Source: Bloomberg, as of 4 May 2020
The information contained in this publication is not intended as investment advice or recommendation. Non contractual document. This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target.
Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.
The views expressed herein do not constitute investment advice, research or trade recommendation. Such views are the personal views of the author only and do not necessarily represent the views of HSBC Global Asset Management (Hong Kong) Limited.
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