Post-pandemic trade in Asia: cheer and concern

The two distinct features of the economic landscape during COVID-19 have been a surge in household savings and a sharp decline in spending on discretionary services such as eating out, travel, and recreation.

"A surge in demand for discretionary services is desirable as it will help bridge output gaps and alleviate unemployment woes.”

Not only did households save more amid caution, they were ‘forced’ to do so as mobility restrictions limited traditional channels of consumption and spending. ANZ Research estimates the decline in Asian household spending on discretionary services in 2020 could be the sharpest since the 1997-98 Asian Financial Crisis.

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In other words, the unique interplay of fallen spending and increased savings implies there is a lot of pent-up demand to be released, especially once vaccination drives gain sufficient momentum for social distancing measures to be lifted durably.

From the standpoint of growth, a surge in demand for discretionary services is desirable as it will help bridge output gaps and alleviate unemployment woes. However, an accompanying development could be a spike in prices for such services which account for varying but sizable proportions of cash price index (CPI) baskets in the region, spanning between 10 per cent and 30 per cent.

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The timing of the ‘reopening trade’ is difficult to ascertain as it depends on the progress of vaccination in individual economies. However, its eventuality is less of a moot point because ANZ Research thinks financial markets aren’t fully prepared to embrace the change.

At least, this is what bond markets are signalling. The difference between 10-year and 2-year bond yields, which generally rises when future growth expectations improve, has increased only in a few economies - Malaysia, the Philippines, Singapore and Thailand - but flattened in others.

Similarly, the difference between the 10-year and 5-year bond yields, arguably the best indicator of inflation expectations, has risen by less than a quarter of a percentage point in all economies, except the Philippines and Singapore. In fact, the selective and limited rise in bond yields looks more like a reaction to higher US yields than to the prospects of acceleration in domestic inflation.

A larger recalibration therefore seems imminent and the test will be both for investors, who have adapted to the region’s relatively ‘inflation-free’ environment, and the central banks, which may eventually face a tougher challenge in sustaining accommodative monetary policies.

A rotation out of growth stocks (such as technology, e-commerce and entertainment) to value stocks (including energy, travel, hospitality, financials) will also be unavoidable in regional equity markets once household spending on discretionary services picks up.

Value stocks have so far under-performed due to weak earnings momentum while growth stocks rode the global wave of teleworking. This divergence should narrow, if not fully reverse, as household expenditure is recalibrated towards value sectors, which in turn will have consequences for portfolio flows and relative currency performance. This transition, in all likelihood, will also be a volatile one.

Dhiraj Nim is Foreign Exchange Strategist and Sanjay Mathur is Chief Economist Southeast Asia and India at ANZ

This article is based on the report Asia: Bracing for the ‘reopening trade’ by ANZ Research