A letter from Asia
Calm, but not complacent
More than two months since the outbreak of Covid-19 in Hubei and relative calm has returned to China. The number of infections has slowed substantially, paving the way for daily activities to resume steadily, slowly, but surely. Mobility restrictions across China have eased and even travel into and out of Hubei province has been relaxed. Migrant workers have mostly returned to their workplaces, which in turn means factory production is resuming and the supply chain backlog is easing.
The most recent statistics convey a picture of a country edging forward. Coal production has risen back to 90% of pre-virus levels, pointing to a healthy rebound in industrial production. Property sales in large cities are back up to 60% of normal levels, with a similar rate of property construction taking place. Increasing urban traffic (using the Baidu local movement index that tracks cars, public transport, bicycles and foot) points to a quick reboot of the economic engine.
It is perhaps still too early to declare an outright victory as there are still intermittent cases of imported and local infections. But it can be said that China is very near to the finishing line in the race against the coronavirus.
China’s road to recovery
As the initial epicentre of the coronavirus, many lessons can be learnt from China: For example, the importance a swift government response (resting on lessons learnt during the SARS outbreak in 2002-2003) with total or partial lockdowns across many cities alongside other mobility restrictions and intensified health screening. A strong case can also be made for a relatively swift rebound in economic activities once the spread of Covid-19 has eased: After falling to a historical low in February, the manufacturing PMI rebounded strongly back to 52 in March (above 50 signals manufacturing sector expansion).
The first quarter’s economic growth figure will not look pretty, with current market estimates suggesting a contraction of close to 10% from a year ago. This extraordinary pullback in growth, however, overshadows an improving outlook from the second quarter onwards.
There will be bumps along the way, internally from a weaker job market, weaker income and some supply chain disruption, and externally from softer export demand due to the synchronized global recession. But fiscal and monetary support has been shown to produce the desired effects in China. As we saw during the Global Financial Crisis, the market should not underestimate the will of the Chinese government to pull the economy out of this very unexpected black swan event.
Furthermore, China will continue to benefit from some of the most desirable structural megatrends, in the form of urbanization, the rising middle class and increasing consumption levels. China, which is a key global growth engine, is emerging from the crisis and this bodes well for the rest of the world in the coming months.
Will the rest of the region follow the same path?
Elsewhere across Asia Pacific, there are also concerted efforts to contain the spread and duration of Covid-19. Travel restrictions, social distancing and quarantine measures may be uncomfortable in the short-term, but they provide confidence and hope that the light at the end of the tunnel will reappear sooner rather than later.
From strong reserves built up during the good times, governments are also providing extraordinary spending measures to support businesses and consumers, such as rebates, tax concessions, food vouchers and salary supplements to name just a few.
Like China, a severe downturn in growth is expected in the first quarter but we should start to see some green shoots emerging from the second quarter onwards, albeit slowly before activity momentum accelerates in the second half.
Compared to the Global Finance Crisis, in which the U.S. was the main growth engine, the tighter trade links with China (now the second largest economy in the world) will help engineer a quicker and more robust turnaround in fortune for the rest of the region. While most of the region’s economies are expected to contract in 2020, most are also expected to grow significantly above trend in 2021, as the more forceful monetary and fiscal measures kick in.
Despite the short-term setback, the longer-term prospects for Asia Pacific remain firmly in place: untapped demographic dividends will continue to drive business investments and the changing demand for real estate. The experiences of China and the rest of Asia Pacific, being the first to succumb to the virus but also the first to begin emerging from it, can provide a strong guiding light and great promise to the rest of the world.
What should investors do in the meantime? Nuveen Real Estate’s underlying investment philosophy will prove even more invaluable in helping investors navigate this challenging period to be in an even better position over the long term. That philosophy is to invest in vibrant, resilient, well-diversified and fundamentally strong cities and markets while looking past short-term cyclical volatility.
Investors who have in the past few years invested into structurally resilient markets should continue to stay well anchored even in today’s environment. That’s markets such as logistics in Tokyo and Seoul that are fuelled by e-commerce and high internet penetration, and also demographically robust sectors like multifamily in Tokyo, discounted luxury outlet malls in China and the Australian student accommodation sectors. These sectors should be resilient over the long run, where short-term cyclical fluctuations in values are shallower than in other sectors while income durability remains strong.
A final point to make is that a unique window of opportunity – through pricing adjustments – will start to surface across some markets, just as we saw during the Global Finance Crisis, This will allow investors with patient capital to penetrate previously challenging markets and previously difficult-to-access, sought-after assets. This will be the case particularly in more opaque markets with more off-market opportunities, where pricing gaps through market dislocation will allow investors to enhance long-term returns.