Asia ex-Japan equities started the year on an upbeat note, advancing 9% YTD as of 2 Feb 2021. North Asia again led the rally, similar to 2020, as the winter wave of infections extended tech outperformance. By contrast, ASEAN equities have lagged. The winter wave interrupted the recovery in tourism reliant Southeast Asia, but it is not derailed. With the rollout of the vaccines and the upcoming spring, Citi analysts believe the recovery could eventually broaden into services sector of Asia later this year, and allow equity market laggards to catch up.
Policy normalization in China may limit near-term returns and push for further rotation toward cyclical industries and markets. As such, Citi analysts reduced equity overweights in China, Taiwan and Korea to neutral, while adding to Southeast Asia. Citi analysts also see dividend opportunities, preferring companies with higher-than-average dividend yields and quality characteristics that could pay dividends sustainably.
Added allocation to Asian credit
Citi analysts added to Asian bonds to take advantage of weaker USD and continued economic recovery. Citi analysts see CNY bonds as a good way to diversify from USD and pick up positive carry, with a potential currency kicker.
The market may be over-estimating the scope of property sector credit risk. In August 2020, Chinese authorities introduced the “three red lines” rules, which capped the amount of debt financing developers can raise based on three leverage metrics. Since then, two major developers have run into trouble, as financing deals made years before the new rules came due, and they faced difficulty in refinancing.
Yet, home sales and prices have strengthened and authorities are unlikely to enforce deleveraging like in 2018. Citi analysts believe that recent widening in credit spreads may be over-estimating default risks in the sector and hence creating a potential opportunity.
Healthcare in Asia
Citi analysts added to global Healthcare equities, as a thematic overweight. Asian Healthcare have actually outperformed global peers in 2020, mainly due to the outperformance by companies in the healthcare supplies, online medicine and biotech areas. At 38x 2021 consensus estimated EPS, Asian Healthcare is not cheap but Citi analysts still see three sub-themes that may do well - 1) Medical distributors in China; 2) Recovery of non COVID-19 related pharmaceuticals and medical services with Chinese, Indian and Japanese firms likely to take part; and 3) Online medicine could remain in growth mode, as it benefits from the shift towards online business, with significant policy support.