How to Play the Recovery

As Asian economies move along the path to recovery after COVID-19, here are three things to keep in mind.

Kate Lin, CAIA 27 April, 2021 | 10:32
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Korea vaccine recovery

As countries around the world begin to vaccinate their people against the coronavirus, there is hope that this could be the beginning of the recovery after the pandemic. Within Asia, the path is mixed and uncertain. While the pandemic continues to rage in some parts, others are opening up.  

From an economic standpoint, things are likely to stay uneven for the rest of 2021. Lorraine Tan, Morningstar Asia’s Director of Equity Research, points out that the market environment makes spectacular equity gains unlikely in 2021, especially when compared to the post-lockdown stock rally last year.

“Current valuations across Asian markets are not overly stretched, and that should leave some opportunities for investors. Fundamentals continue to be key differentiators from one stock to another,” she says.

Here are three tips for investors to help navigate through the bumpy Asian recovery road ahead, along with our analysts’ top picks that fall into these categories.

Tip 1: Be Selective

It is important for investors to focus on the fundamentals of the stocks they are researching and to be very selective when they pick companies. These actions are critical to help uncover quality names. For instance, consider companies that have an ‘Economic Moat’.

A company with an economic moat can fend off competition and earn high returns on capital for many years to come. The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company whose competitive advantages we expect to last more than 20 years has a wide moat; one that can fend off their rivals for 10 years has a narrow moat; while a firm with either no advantage or one that we think will quickly dissipate has no moat.

Companies with a wide economic moat tend to be more resilient, and have long-term potential, which sets them apart from other players. When picking sectors, if you stick to these “moaty” large-cap names , you could have a higher chance of picking a quality company. Here is a company that is trading below our fair value estimate, and also has a ‘Wide’ economic moat rating:

Taiwan Semiconductor Manufacturing Company (02330)

Morningstar Rating (as of April 23, 2021): ★★★★

Industry: Information Technology

Taiwan Semiconductor Manufacturing Company (TSMC) is expected to benefit from an industry-wide shortage of chips over the next two quarters, even as customers like Apple and Qualcomm need more. Customers are demanding more capacity of the Taiwanese firm’s chips that are used primarily in mobile, PC and memory products. Short-term tightness aside, TSMC is well positioned to advance the limits in semiconductor manufacturing. The Taiwanese firm’s capital expenditure in chip upgrades, which is estimated to exceed TWD900 billion (USD32.3 billion) by 2023, shall bear fruits as autonomous driving and high-performance computing applications are being adopted by a wider base of users. Its highly competitive product range and visible order and research pipeline earn the firm a wide economic moat rating.

 

Tip 2: Dividends

Investors love dividends.

As Morningstar.com’s Director of Investor Education Karen Wallace explains, “Dividends are typically an indication that a business is established and financially healthy enough to return cash to shareholders. Dividends also force management to be focused on the long term and disciplined with their capital allocation decisions: After a company declares a dividend, it usually tries very hard to avoid cutting the payout, even during lean times. A dividend cut is a signal that a company's earnings are weakening, which will lead many investors to dump the shares.”

If you like dividends, here’s an undervalued name to consider:

CNOOC (00883)

Morningstar Rating (as of April 23, 2021): ★★★★★

Industry: Energy

Continued recovery and the ongoing vaccine rollout around the world will bolster oil demand growth. Meanwhile, shale companies are maintaining discipline with 0%-5% volume growth aspirations, even as OPEC is not in a hurry to unwind production cuts, leaving oil markets undersupplied. Looking at this upstream oil play, we believe CNOOC is currently undervalued with weakness in oil prices largely priced in. Given its cost efficiency, with an all-in cost of around USD 30 per barrel, the firm has a positive profitability outlook over the long term, even under our midcycle Brent oil price forecast of USD 60. This shall support its dividend payout which currently stands at a decent level of more than 4%.

 

Tip 3: Benefit from The Recovery

Industries and companies that have been reliant on being physically present, or that required human interactions, were beaten down in 2020. Wider vaccination will gradually reduce the need for social distancing, which offer these previous laggards an opportunity to catch-up.

Here’s one name that stands out:

SJM Holdings (00880)

Morningstar Rating (as of April 23, 2021): ★★★★

Industry: Casinos and Gaming

The availability of vaccination and the recent easing of COVID-19 test requirements for entering gaming floors are encouraging, which will help to improve overall travel sentiment, and support for return of local demand. Following gradual relaxation of the restrictions, the Macao gaming sector began to recover meaningfully, with gross gaming revenue returning to about 30% of the pre-pandemic levels. Beyond macro improvements, SJM has a potential market share turnaround point as it opens the resort Grand Lisboa Palace in Cotai. Its improving operating efficiency by transferring redundant labor force to the new property will also likely support the higher returns on invested capital.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
CNOOC Ltd7.77 HKD0.65Rating
SJM Holdings Ltd5.58 HKD4.10Rating
Taiwan Semiconductor Manufacturing Co Ltd607.00 TWD0.83Rating

About Author

Kate Lin, CAIA

Kate Lin, CAIA  is a Data Journalist for Morningstar Asia, and is based in Hong Kong

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