Asian stock market outlook 2021: time for sleeping giant to wake

Stocks here have thrived despite Covid, but big things are expected from one massive market.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

It all looked like coming right at last for Japan in 2020 until Covid-19 struck. Now the country looks to be one of the nations least able to cope with the pandemic, especially compared to its Asian nations. 

Overseas demand for Japanese products, particularly from China’s emerging consumer class and from elsewhere in Asia, seemed to be heralding a period of growth after two decades of stagnation. Covid-19 infection rates remained lower than in other developed countries earlier this year and a decline in GDP in the first half of the year was reversed in the third quarter.

The year ends, however, on a downbeat note. Although infection rates remain well below levels seen in the US and Europe, they are on the rise again, with GDP still about 5% below the level at the end of 2019.

New confirmed cases have hit a record high and restrictions have been imposed in various parts of the country, leading to fears that weak consumer spending, already down nearly 8% on a year earlier, will contract further under the impact of a rise in consumption tax in October last year. Business investment is weak as industry struggles with excess capacity.

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Demand for exports could suffer if renewed waves of Covid-19 hit demand in the Western world and there are signs that China is running down stocks built up as a precaution to allay fears that the pandemic would hit the supply chain. 

There is little hope that domestic demand in Japan will take up the slack. Large centres of population have had restrictions placed on them controlling economic activity and tourism has been curtailed severely. Tokyo, for example, has extended a ban forcing restaurants, bars and karaoke establishments serving alcohol to limit business hours until mid-January.

Prime Minister Yoshihide Suga has announced aid packages for businesses affected by local measures, and his government is putting together another stimulus package to tide companies and employees over until a vaccine is widely available.

He must hope that this has more effect than stimulus packages introduced by a string of Japanese prime ministers over recent years, packages that have had limited impact on a stagnant economy.

Despite the difficulties, the Tokyo Stock Exchange has been one of the best performers this year and it shows no sign of running out of steam. The main index, the Nikkei 225, started the year at 23,200 points, peaked at 23,860 and slumped to 16,500 in mid-March. A sharp recovery levelled out in summer before a new surge in November took the index to 26,800. 

Source: TradingView as at 17 December 2020. Past performance is not a guide to future performance

Clearly, investors remain more optimistic than the circumstances seem to justify.

Several other Asian countries that were early victims of the spread of coronavirus have come out of the crisis more rapidly. Some of the better performers are smaller countries that took swift and decisive action to control the outbreak. They represent decent investment prospects for the immediate future.

Taiwan, as a small island nation, has been able to secure its borders. Its main worry is not from the virus but from the political attentions of China, which claims the territory. The political threat is real, although Beijing has not acted on it for 80 years and there is no sign that it will do so any time soon. 

South Korea does have a land border, but it is with the hostile North, so again it has been able to restrict movement in from abroad.

Both countries have thrived over the past 40 years through developing high-quality electric and electronics industries, performed strongly in 2020 and are likely to impress further next year. Taiwanese companies, in particular, have a strong record of increasing dividends, while Korean counterparts have become more attractive because they have recently taken steps to improve corporate governance rules.

Singapore falls into the same category, a small nation that can isolate itself and one that has a strong government able and willing to take tough political decisions. It not only has a skilled population working in high-tech industries, but it is also the financial hub of South East Asia. Its stock exchange is small, but you can invest there in confidence.

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Asia’s sleeping giant used to be China, the most populous country in the world. Now the title has been passed to India, the second largest, which has occasionally stirred only to disappoint. Growth has admittedly been strong compared with that in developed nations, but it is hard to avoid the feeling that India’s full potential has not been achieved.

Now, towards the end of a very disappointing year economically, it has gone into recession for the first time since British colonial rule ended in 1947. The economy shrunk 25% in the second quarter and unemployment is soaring. India has been hit harder by Covid-19 than any other Asian nation as the virus has spread rapidly across a country with widespread poverty and heavily populated cities.

A cloud will hang over the South Asian nation until the Covid-19 epidemic subsides, so the New Year will probably not get off to a bright start. A banking crisis, caused by the collapse two years ago of major lender Infrastructure, Leasing and Financial Services, rumbles on with banks struggling to put together cash to lend to businesses that could spark a recovery. Bad loans look set to rise.

As 2021 progresses, however, economic circumstances should improve and growth of 6% should be achievable, possibly by 2022. India has a growing young population, the kind of demographic time bomb that China defused through a one-child policy that is unthinkable in India, and education has improved so there are skills to be harnessed.

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It has a stable if slightly unwieldy democracy and, although the current government is controversial, it is business friendly. Narendra Modi’s Bharatiya Janata Party (BJP) is blatantly pursuing a policy of Hindu nationalism without due regard for the minority religions and the outcome could be disruptive. However, Modi has now won two general elections and has a strong grip on the nation.

Over the past 10 years, India has grown from the world’s 10th-largest economy to the seventh and it has the potential to move up to third behind the US and China in time. If, like China, it can turn sufficient numbers of its poverty-stricken masses into a consumer class, there is enormous scope to usher in prosperity.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.