Asia’s Corporate Earnings May Surprise on the Upside

Earnings across Asia have held up better than many analysts expected following a difficult year for the global economy. Portfolio managers Sharat Shroff, CFA, and Inbok Song discuss how Asia’s economies—and businesses—have found their footing more quickly than those in North America and the Eurozone.

In 2020, there seemed to be a decade of change compressed into a single year. What were some of the notable events?

Sharat Shroff: The pandemic provided markets and companies with a major catalyst and accelerant for change. Before the pandemic, the adoption of e-commerce, software services and digital ways of doing business was previously happening at a slower speed in many parts of Asia, particularly in South Asia. But the pandemic accelerated the move into warp speed, which is creating new opportunities for innovative businesses. Another significant trend we saw was the acceleration of labor reforms in India and Indonesia. Labor reform tends to be a sensitive topic, but some of the changes may ease the cost of doing businesses, and support labor-intensive businesses. And finally, we continue to see further deregulation and liberalization of China’s capital markets including greater openness towards foreign investment, which is providing additional liquidity and support for China’s rapidly growing bond and equity markets. The continued deregulation of capital markets in China may also help increase availability, and lower the cost of capital for enterprises in the country.

You remain sanguine about Asia’s earnings recovery. What drives your optimism?

Inbok Song: In 2020, corporate earnings across Asia dropped much less than analysts initially feared and we believe that earnings may rebound strongly in 2021. Taiwan and South Korea, for example, both contributed significantly to the year-on-year growth in Asia. Both economies did a strong job in containing the pandemic. They are also home to companies that are benefiting from demand for semiconductors. This demand is being catalyzed by 5G, new energy vehicles and penetration of cloud-based services. Another positive trend we see is that companies and management teams were very agile in cutting down costs and reining in capital expenditures. Free cash flow was resilient in the course of 2020.