Why some stock markets can defy gravity longer than others?

• Asian equities are in the sea of red. Thrashed by one fear after another, most markets have either entered the bear market or are getting close to the line. A widely spreading coronavirus pandemic, an unsolved oil dilemma and lower interest rates are intensifying fear not only for recession but even depression. Still, differences exist with mainland China, New Zealand Hong Kong and Taiwan in defying the gravity.
• Under the current trilemma (coronavirus pandemic, weak oil and ultra-low rates), the sectors facing the biggest headwinds are energy, financials, consumer discretionary, industrial and materials. Instead, consumer staple, real estate and information technology should be less affected given the inelasticity on essential sales and the medium-term market outlook on 5G related demand. Health care, utilities and communication services are more resilient.
• Among Asian markets, Taiwan and New Zealand are less negatively affected by the coronavirus directly due to sound and proactive policies and low exposure to oil in benchmark indices. The other reason is the sectoral composition of the indices. Although the recent turbulence has dragged performance, information technology has proven to be relatively stable in this round of market rout and constitutes 51% of market capitalization in Taiwan. New Zealand’s index is dominated by resilient sectors, such as communication services, health care and utilities, and to a lesser extent consumer staples. The limited exposure to financials also imply New Zealand is less sensitive to ultra-low rates.
• In addition, equities in mainland China seems to be somewhat insulated from the world. Beyond the positive official news on the control of coronavirus spread, recent data is disappointing so it is hard to understand the reason for such resilience. While health care and information technology have supported Shenzhen, the reasons behind the performance of Shanghai is unclear. Hong Kong has also benefited due to its stronger correlation with Chinese equities as a whole.
• The rest of Asia have all turned into bears. Thailand is the worst given its exposure in oil and tourism. While Australia and Indonesia are also affected by energy, the impact is amplified through financials and materials. Singapore is impacted negatively with large share in financials under a low rate environment The sectoral composition and the nature of being oil importers show Japan and Korea could have performed better but limited by the large domestic virus outbreak, which also mean the tide may revert if the pandemic is further controlled.
• All in all, different sectoral compositions of Asian equity indices do offer some guidance to the future evolution for investors, especially when the “risk on, risk off” behavior changes in response to evolving uncertainties.

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