The way in which countries in the Asia Pacific region dealt with the coronavirus pandemic is well documented. Governments in that region reacted swiftly and implemented strict lockdown measures to curb the spread of the virus. However, the recovery and pace of growth has not been uniform across the region, with North Asian countries outperforming those in the South – creating a North/South divide. In this article, Mike Kerley and Sat Duhra, Portfolio Managers of the Henderson Far East Income Trust, explore some of the factors that have led to this divergence in performance.

The Covid effect

Across the pond, countries in Southeast Asia were slower to react and struggled to contain the virus, leading to severe disruptions in economic activity and much slower growth in 2020. The same countries also struggled to reopen fully in 2021, amid recurring waves of the delta variant, and the arrival of the more infectious omicron variant has certainly made matters worse – muddying the outlook for 2022.

Asia GDP growth
Country	2020	2021 (e)
China	2.3%	8.0%
Taiwan	3.1%	6.0%
Indonesia	-6.1%	1.0%
Malaysia	-5.6%	3.5%
Philippines	-9.6%	3.2%

Source: International Monetary Fund

While the arrival of Covid-19 vaccines has been a breath of fresh air for the global economy, they haven’t been the game-changer some had hoped for in Asia. If anything, they have made things slightly worse in the short term due to the uneven distribution of vaccines across the region. China has fully vaccinated around 83% of its population, whilst South Korea and Taiwan have vaccination rates of 81% and 64%, respectively. The picture is not as encouraging in the South: Indonesia and the Philippines have fully vaccinated around 40% of their populations. Though Malaysia and Thailand have much higher vaccination rates of 80% and 63%² – they still rank in the bottom five of Bloomberg’s Covid Resiliency Rankings³, alongside Indonesia and the Philippines – highlighting their ongoing struggle to tackle the virus.

Underneath the hood

Another key indicator of the North/South divide has been the stock market performance. North Asian markets significantly outperformed their Southeast-Asian peers in 2020 and continued to do so in 2021⁴. Even though China’s stock market struggled in 2021 due to the regulatory clampdown and stress within the property market – it is still trading at a higher level than markets in Malaysia, the Philippines and Indonesia.

Looking underneath the hood, it’s clear why North Asian countries have outperformed. In 2020, we saw technology (tech) companies perform strongly, benefitting from secular growth drivers and minimal interruption from the pandemic: many workers adapted to working from home, demand for goods and services rose, and there is often no need for physical locations when interacting with customers. These trends drove strong demand for different types of tech companies in 2020, and some continued to be in vogue in 2021 amid the threat of renewed lockdown restrictions.

Unsurprisingly, the companies that have performed well over the last two years are well represented within North Asian indices. For example, tech makes up 72%⁵ of Taiwan’s index and 47%⁶ of South Korea’s, with Taiwan Semiconductor (44%) and Samsung Electronics (31%) the major constituents of the respective indices. In China, the story is more nuanced. Though the tech sector accounts for only 7% of the index, the reclassification of GICS sectors in 2018 saw tech giants such as Tencent, Alibaba and Meituan move into sectors such as communication services and consumer discretionary. As a result, we saw the weights of these sectors receive a boost, whilst the tech weighting decreased significantly⁷. So looking back over the last two years, those “tech” gains were realised in the communication services and consumer discretionary sectors.

MSCI China sector reclassification
	Before	Now
Communication services	5.0%	18.3%
Information technology	36.7%	6.9%
Consumer discretionary	8.6%	31.5%

Source: Fund Selector Asia, as at 11/07/2018 and MSCI China Index, Fact sheet as at 30/11/2021 

In the South, tech companies hardly feature on the indices in Malaysia, Thailand, and the Philippines. The sector does not even appear on MSCI factsheets. The underrepresentation of these fast-growing companies within these indices means that they missed out on the substantial gains registered in 2020, as well as the sustained growth rally markets experienced in 2021.  

A closer look at the industry make-up of these countries sheds further light on why they might continue to lag in the short term. In Thailand, the sudden drop in tourism flows – which accounts for about a fifth of GDP and 20% of employment⁸ – dealt a massive blow to the economy, particularly small/medium-sized businesses in contact intensive sectors. A similar story can be found in the Philippines – an economy dependent on services, manufacturing, and agriculture – where businesses and production lines were forced to close to curb the spread of the virus. The arrival of the omicron variant has certainly not helped the situation, several Southeast Asian countries still have restriction measures in place.  

That being said, it’s not all doom and gloom, and we believe there is scope for Southeast Asian economies to catch up with their Northern counterparts. The region has tremendous growth potential, despite the challenges these countries are currently experiencing. From a short-term perspective, as vaccination rates pick up and countries learn to deal with the virus, we should see economic activity pick up, resulting in higher growth. In addition, the resumption of global travel and full reopening of the service sector should serve as a strong boost to those countries and companies that have been hardest hit by the pandemic. Furthermore, fiscal policy in some of these countries is expected to remain accommodative providing a further boost to growth.  

Longer-term, we believe the region’s growth story remains positive as the structural trends remain intact. It remains the fastest-growing region globally, and three key factors suggest it is set for further disruption: population, technology, and urbanisation. Population: as a proportion of the global middle-class population, the Asian middle class – which is becoming an ever-larger local market for goods and services – is set to rise from 28% in 2009 to 53% this year and 65% by 2030.⁹ Though Asian countries make up more than half of the world’s middle class, they only account for only 41% of that group’s consumer spending. That figure is set to exceed 50% by 2032.¹⁰  

Technology: there is rapid technological advancement and adoption happening across the region. This should strengthen the digital infrastructure and shift the development paradigm towards more efficient technologies that should enable companies to better deal with unexpected shocks to the system – the transition to working from home being a key example. Urbanisation: cities drive growth – 85% of global GDP generated in cities – and it is widely predicted that 90% of global urban growth will occur in Africa and Asia. 46% of Fortune 500 companies will be headquartered in the emerging markets by 2025, and seven out of 10 of the world’s largest cities in 2030 will be in Asia. Having driven global growth in recent decades, Asia role in the world economy is set to become more meaningful still, despite the short-term pains we are currently seeing play out. 

• ¹ Source: International Monetary Fund as of October 2021 World Bank Data: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=PH * e = estimate
• ² Source: The New York Times: Tracking coronavirus vaccinations around the world
• ³ Source: Bloomberg: The Covid Resilience Ranking, as at 30 November 2021
• ⁴ Source: Bloomberg, 01/01/2020 – 20/12/2021
• ⁵ Source: MSCI Taiwan Index, Factsheet as at 30/11/2021
• ⁶ Source: MSCI South Korea Index, Factsheet as at 30/11/2021
• ⁷ Source: MSCI China Index, Factsheet as at 30/11/2021 and Fund Selector Asia, Has China become less tech after GICS changes
• ⁸ Source: International Monetary Fund, Thailand 2021 Article IV Consultation
• ⁹ Source: World Economic Forum, The rise of Asia’s middle class
• ¹⁰ Source: Bloomberg, More than 1 billion Asians will join the global middle class by 2030

Glossary Terms Expand

Fiscal policy – Government policy relating to setting tax rates and spending levels. It is separate from monetary policy, which is typically set by a central bank. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.

Gross domestic product – The value of all finished goods and services produced by a country, within a specific time period (usually quarterly or annually). It is usually expressed as a percentage comparison to a previous time period and is a broad measure of a country’s overall economic activity.