Is the worst of it over? Let's look at the example of China

The worst seems to be behind us. The number of new infections has begun to fall in most countries, hospitals are no longer the scene of apocalyptic chaos, respirators and masks are in good condition, and everyone is now talking about plans to de-confinement and when the world economy will reopen.

In this sense, China is at the forefront of deconfinement. What is happening there could well be used as a model for what is expected elsewhere. Despite the fact that the country has reopened (although movement between provinces is strictly controlled), the Chinese population is still very cautious: traffic on public transport is limited, with mostly empty train stations, property sales and traffic jams, which are typical indicators of activity, have stabilised after starting to rise in March, restaurants are at half their capacity, shopping centres are seeing the volume of visits cut to half of what they were before the crisis, and fast food restaurants are busier during the week than at weekends. For example, Yum China, which operates Kentucky Fried Chicken nationwide, has launched special offers for Saturdays and Sundays. Only 64% of people surveyed visited a restaurant during the month of April.
 

Clearly, society remains very wary of a second wave of contagion, and this is not surprising, as Heilongjiang province saw a sudden outbreak of the virus in April that caused fears throughout the country. At present, the factories are all operating and producing according to the guidelines of the central government, which gave priority to reopening the economy. However, order books are not full, as foreign customers remain confined, leading to large stocks of products in warehouses. Shopping centre owners gave up rentals when the cities were closed, but this is now over, although the transit of people remains low. The Government waived all social security payments, and local authorities suspended tax collection while providing subsidies to companies that could not operate during closure, but this too has ended.

So we believe that the second quarter results of listed Chinese companies could be almost as bad as those in the first quarter, even though China has reopened.
 

To get back on its feet, the Asian giant needs the coronavirus situation to be brought decisively under control worldwide and foreign economies to reopen and revive. Before these two conditions are met, we believe that the Chinese government will not announce any powerful fiscal stimulus or aggressive interest rate cuts. That would be a waste of ammunition.

So far, fiscal measures have been a one-off effort amounting to only 3% of GDP. The so-called "helicopter money" was limited to certain cities and strictly focused on consumption, such as the city of Nanjing, which gave away $45 million in restaurant coupons to its 8.8 million citizens (or less than $6 per person). It is therefore crucial for China that Europe and the United States reopen as soon as possible to boost demand for Chinese products. It is then that China is likely to decide to act strongly on the monetary and fiscal fronts, with the positive impact that can be expected in the stock markets.

In the meantime, we are of the same opinion as at the beginning of 2020: we will end the year with higher Chinese stock indices. Chinese stock markets outperformed all developed markets in 2019 and are repeating the feat again this year. We believe that a significant part of the considerable amount of cash being printed through quantitative easing by the Fed and the ECB will be invested in Chinese stocks and bonds. The country offers abundant market liquidity, a combination of sound monetary policy with positive real interest rates, a stable currency backed by a neutral current account and large foreign exchange reserves, a weighting in the MSCI indices that continues to rise, an economy that can withstand the current turbulence thanks to the demand of its growing middle class and, above all, political stability.

Leaving China aside, we see two very different images when we look at North and South Asia.

North Asia consists of South Korea and Taiwan. From the perspective of a pandemic, these two regions performed remarkably well in controlling the spread of the virus. They are often cited as role models. Taiwan (23 million people) has only had six fatalities, although there has never been any containment, only drastic measures requiring a high sense of individual discipline. For the record, Hong Kong, where we are based, is in a very similar situation, with 7 million people, only four deaths, no confinement, but with closed borders and strict social distancing measures implemented on the basis of a remarkable sense of self-discipline. From a business point of view, Taiwan and Korea seem to be doing reasonably well: their all-powerful technology sector, driven by TSMC, Samsung Electronics and SK Hynix, shows little sign of slowing down. These three companies have announced their first quarter numbers and their outlook for the whole year, which surprised analysts in a very positive way. With these three companies being dominant forces in the chip and memory sectors, they are a key barometer for the entire technology industry. We are not surprised that, together with China, these markets have been outperforming emerging markets so far this year.
 

In South Asia, the picture is very different. India is in a worrying situation. The government's fiscal deficit was already 3.7% of GDP last year, and 7% of GDP when the deficits of all states were consolidated. The government panel is pushing for a stimulus package equivalent to 5% of GDP, but the executive seems to be turning a deaf ear. So far, the only aid package provided by the Government was $23 billion, or 1% of GDP, which we see as a drop in the ocean. The general view among economists is that Modi's Government is far behind when it comes to taking decisive action and measures. The Reserve Bank of India seems almost paralysed and has been for two years now, since the crisis of the non-bank financial companies (or NBFC) started with the bankruptcy of IL&FS. The coronavirus outbreak has only exacerbated this observation.

In Southeast Asia, we would like to highlight the differences we see between two countries that, when viewed from a distance, may appear similar: Thailand and Indonesia.

Thailand is already suffering considerably from the coronavirus, as tourism, which represents almost 11.5% of its GDP, has almost evaporated, not to mention that tourism has ramifications in many sectors of the economy. Three fiscal stimulus packages equivalent to 13 per cent of GDP were recently announced, adding to the 2.6 per cent fiscal deficit that the Government had already budgeted for prior to these stimulus measures. Not surprisingly, the Thai baht has depreciated by 7.1% against the US dollar so far this year. But what worries us most about Thailand is the long-term impact of the coronavirus on the aviation industry, and more specifically the current disappearance of low-cost airlines that the pandemic has triggered and from which the Thai tourism industry has benefited greatly. Without low-cost airlines bringing in crowds of tourists, Thailand's resorts may be very different in the future.
 

In Indonesia, approximately half of the country is in lockdown. However, the Indonesian version of confinement is not drastic: people can live a normal life in their localities even though these are under strict access control for outsiders. Bank Indonesia has managed to reassure foreign investors, who are critically important, as they control 32 per cent of the country's sovereign debt. The central bank has embarked on a quantitative easing exercise equivalent to 3% of its GDP, has cut its reserve requirement ratio for banks and, most importantly, has signed a $60 billion swap agreement with the United States Federal Reserve. This was enough for the rupee to appreciate by 10 per cent in April, after having depreciated by 17 per cent in the first quarter of the year. These are decisive measures that give us confidence in the long-term trajectory of the Indonesian economy.