Schroders: What ails Asian equities and where to from here?

Abbas Barkhordar, Portfolio Manager, Schroder AsiaPacific Fund plc, discusses why, despite a shaky start to 2022 for many Asian stock markets, the region continues to offer a diverse selection of attractive companies at reasonable valuations.

It has been an inauspicious start to 2022 for many Asian stock markets. Although there have been some bright spots – notably Australia and the smaller ASEAN markets – performance of the overall region has been dominated by the weakness of the Chinese market.

After a torrid year in 2021, and the MSCI China Index down by more than 20% in GBP terms, some investors had hoped for calmer seas in 2022. Unfortunately, that has so far proved to be rather optimistic, with the MSCI China Index remaining extremely volatile and already down a further 12.5% in GBP terms since the start of 2022 (to 17 March).

There have been a number of negative developments driving this latest bout of market weakness in China; each individually concerning but in aggregate leading some investors to question whether the market has now become “uninvestable”. However, most of these factors were not risks that we were unaware of coming into the year and in large part, they represent a continuation of the concerns which made 2021 such a difficult year for Chinese equities.

As such, we have not fundamentally changed our opinion and we still see the long-term outlook for Asian equities as attractive, with a diverse selection of structurally attractive companies available across the region at reasonable valuations.

Covid outbreaks

The tragic reports which have emerged during Hong Kong’s fifth (and by far most deadly) wave of Covid-19 have been a stark reminder that the pandemic is by no means over in many parts of the world, something that can be easy to forget from the UK where life is gradually returning to normal.

Many observers had warned last year that such an outcome would be hard to avoid in Hong Kong if the more transmissible Omicron variant of Covid-19 started to spread there, given the age distribution of their unvaccinated population. A quick look at the vaccination rate in the elderly population (who are by far the most at risk of severe outcomes from the disease) would have made clear the risk that Hong Kong’s population faced from a widespread outbreak.

In recent weeks, an upsurge in cases across several cities in China, and very strict lockdowns imposed in response, have led investors to extrapolate Hong Kong’s appalling experience to what they expect to see on the mainland. However, there are two differences one should keep in mind between Hong Kong and the mainland. Firstly, China has a better (though by no means good enough) vaccination rate amongst the elderly.

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