An update from our investment managers, Adrian Lim and Pruksa Iamthongthong - 21 May 2020
Unsurprisingly, there is little clarity and this means volatility is here to stay. A recovery in growth will depend on many things. How effective the monetary and fiscal responses are in stimulating economies. How soon the covid-19 outbreak dissipates. How quickly financial and liquidity conditions return to normal levels. How confident consumers are to go out and open their wallets again. How confident companies are to resume their capital spending again.
Nevertheless, we take comfort in that our companies have solid balance sheets and they have endured similar disruptions in the past. We believe that the fundamentals of our invested companies remain intact and should be relatively more resilient during such times. As the market has been indiscriminate during this sell-off, we intend to be opportunistic amidst the uncertainty.
Across most sectors, we have seen guidance downgrades in the first quarter of 2020. It is too early to ascertain the potential impact on the rest of the year, but the longer the covid-19 outbreak persists, the higher the certainty that this disruption would hold back a sharp recovery in the second half of the year. Global growth and supply chain worries amid the covid-19 outbreak and subdued domestic consumption make earnings expectations vulnerable to further cuts. We would expect the first seven months of 2020 to be a challenging period for earnings. More recently, quite a number of our holdings have already cut or withdrawn guidance. Some are beefing up liquidity via capital raising whilst we have seen a tighter rein on capex spending and discretionary costs across the board.
At the portfolio level, we have been vigilant about liquidity risks around our companies. Most of our companies have low liquidity risks backed by the strength of their balance sheet and rightly so given the quality bias in our investing philosophy.
More broadly, despite significant short-term challenges, we still think that Asia is relatively more buffered than elsewhere in the world. It remains the fastest-growing major region globally. It also accounts for more than two-thirds of global growth. Broadly, long-term structural trends are also in Asia's favour. These include the consuming power of a growing and wealthier middle class. Rapid urbanisation also increases the need for better infrastructure. Asia continues to remain at the forefront of technology shifts. The adoption of 5G is progressing, along with autonomous driving. Prospects for high-power computing, data centres and servers remain compelling, whilst AI complexity would boost semiconductor demand and overall market expansion. Autonomous driving is also likely to be a new growth engine.
Asia remains structurally attractive in the long run and while we are cautious given the fluidity of the current situation, we believe that volatility presents a good opportunity for us to selectively build our quality positions at a more attractive price.