Despite the pandemic, markets in China were resilient and we believe that they will continue to reach new highs in 2021. Structural factors that drove the Chinese markets in 2019 and 2020 remain intact and strong leadership enabled the Chinese markets to be among the best performing (if not the best performing) markets in the world. In addition to the structural factors that we have highlighted repeatedly over the past few years, such as import substitution trends, high value-added manufacturing and deep penetration and consumption of e-commerce, new structural factors have started to emerge that stoke our optimism towards the Chinese markets.
We expect North Asia to continue to lead the region’s recovery (at least in the first half of the year). But we also expect the growth divergence between North Asia and the rest of the region to narrow. Unprecedented fiscal support from governments have been pivotal to the ongoing recovery. We expect fiscal action to continue in the coming year but anticipate renewed private sector confidence as the vaccine becomes broadly available and provides a powerful tailwind to regional growth.
Asian countries have, by and large, handled the COVID-19 pandemic better than their western counterparts and are now emerging from that nadir. Most of these countries have plenty of fiscal and/or monetary stimulus headroom. And this superior growth and better national finances are available at a significant discount to developed markets. A languid US dollar will enhance local currency returns in these “risk assets”.
We expect Asian credit spreads will tighten gradually over the coming months, supported by a solid rebound in gross domestic product (GDP) growth for most Asian economies in 2021 and stable to slightly better corporate credit fundamentals.
The global markets surged in 2020 despite the COVID-19 pandemic. While we expect the liquidity-driven rise to continue for a while, we should be prepared for the tide to eventually turn. We identify Japanese industries, notably “Delta ESG” stocks, that could become sources of alpha in the post-pandemic world.
The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) returned -0.27% over the month. The yield curve steepened as 3-year government bond yields ended the month flat at 0.11%, while 10-year government bond yields rose by 7 basis points (bps) to 0.97%. Short-term bank bill rates were largely unchanged.
The S&P/ASX 200 Accumulation Index returned 1.2% during the month. Australian equities lagged key offshore markets during the month. Despite COVID-19 cases rising exponentially in the US and Europe, the start of the vaccine roll-out and further certainty regarding the US election result saw equities move higher.
Asian stocks turned in solid gains in December, buoyed by optimism about a vaccine-led global economic rebound, fresh US fiscal stimulus and robust economic data from China. The MSCI AC Asia ex Japan Index rose 6.8% in US dollar (USD) terms over the month.
The US Treasury (UST) yield curve steepened slightly in December. The UST 10-year bond yield rose 7.5 basis points (bps) to 0.915%, while the 2-year bond yield fell by 2.7 bps to 0.122%. Concerns in the month revolved around rising COVID-19 cases in Europe, particularly in the UK, and over the uncertainty of fiscal stimulus in the US.
We look into the potential economic impact of Japan’s attempt to become carbon neutral. We also analyse why Japan’s fiscal condition draws little attention although the country is on course to spend a record amount in its upcoming budget.