The threat of the omicron variant is becoming real for many of Asia's biggest countries just as it looks set to subside in some Western nations, and that's complicating investors' search for winning share bets in the region.
The problem is that Asian governments are carrying out widely diverging coronavirus policies, with strategies ranging from China's pursuit of Covid Zero to Australia's move to live with the virus, and almost everything in between. The speed of vaccinations and the strength of health-care systems also vary greatly in the region.
It's another example of how Covid is forcing investors to face new challenges, though many remain positive about Asia's ability to weather the storm as its best-performing nations kept deaths from the pandemic at levels far lower than elsewhere. Asian stocks have done better than their European and US counterparts so far this year, after underperforming both of them in 2021.
"Asia will be better braced to cope with omicron waves, which may prove to be more short-lived," said Wai Ho Leong, a strategist at Modular Asset Management. "Markets that are better vaccinated and have timely social distancing curbs are also likely to recover faster from this wave."
That, he says, points to Singapore, South Korea, Taiwan, China and Malaysia as potential winners, with India, Thailand and the Philippines just starting to see surges. Consumer discretionary, autos and banks are among the sectors to bet on, he said.
Western countries from Switzerland to Spain and the U.K. have suggested that the coronavirus pandemic may be shifting to an endemic phase. In Asia, the omicron variant wave is starting to pounce, with cases surging in Australia, a jump in Tokyo infections prompting authorities to raise the Covid alert, and Hong Kong extending social restrictions.
Exhausted by lockdowns, European countries have largely eschewed a return to onerous curbs. Many countries in Asia are "refusing to buy into the rich-country Western narrative that it is milder and will have a lower net impact," wrote Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, in a Jan. 10 report.
The region's two largest markets are among them. For some, China's proven success in stamping out the virus when found means investors there have little to worry about from omicron.
"While isolated lockdowns could disrupt a certain location temporarily, it is likely to have little impact on the economy as a whole," said Jian Shi Cortesi, investment director for China and Asia growth equities at GAM Investments in Zurich. "China's economy has adapted to zero-Covid measures, with most sectors operating normally. For most people it's life as usual."
But others are wondering how long that strategy can be maintained. Morgan Stanley cut estimates for Hong Kong's economy as the city again turns to strict curbs, likely delaying a re-opening with the mainland. China's lockdowns remain local but could become more widespread.
"The odds of a China growth shock because of omicron and Covid Zero are steadily rising by the day," Oanda's Halley wrote.
Japan was among the first countries to attempt a "living with the virus" strategy in 2020, but under the administration of Prime Minister Fumio Kishida Covid policy has grown more cautious despite 80% of the country having had two vaccine shots.
"Japan is now the most strict country in the free world" in terms of border control, said Richard Kaye, a portfolio manager at Comgest Asset Management Japan Ltd., which oversees about $10 billion in Japanese equities. Conversely, he says the strictness makes it the ideal reopening play.
"We can invest in the reopening story with a much bigger, greater visibility than we have in other major economies," he said. Kaye sees airlines, airport operators, railroads and retail likely to benefit when eventually the strict borders are opened.
So far this year, Japan's blue-chip index Nikkei 225 has underperformed the Asia benchmark by about three percentage points.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement