Catch-up potential: Southeast Asia begins to re-open as Covid restrictions are eased

Life in Europe is now mostly back to where it was before the pandemic, but Asia is still fighting against Covid-19 and contending with, in some cases, tough restrictive measures. In the Chinese financial metropolis Shanghai, for example, around 26 million people are currently locked down. However, this drastic measure is overshadowing another development – albeit one that is unfolding slowly –, which is the opening up of the rest of Southeast Asia. For example, since the start of February, Thailand has once again been allowing foreign tourists to fly in without having to quarantine. Similarly, land borders are due to be reopened on 1 July having been closed for more than two years.

Asia’s drawn-out zero-Covid policy gives it great potential to catch up in terms of economic growth. In fact, Asia ex China is the only region where the International Monetary Fund (IMF) expects an increase in year-on-year growth in 2022, i.e., 5.6% for the ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Vietnam), far above their 3.1% figure for 2021. Thailand’s revenue from tourism came to just USD 3.4 billion in 4Q 21, compared to USD 59.8 billion in 2019.

As has proved the case in the US and Europe, this pent-up demand should unleash attractive investment opportunities, particularly in the Asian consumer sector. One such opportunity is in corporate bonds, where risk premiums are likely to shrink over the medium term, thus generating capital gains. The J.P. Morgan Jaci Consumer Index is currently (as of 1 April) trading at about 450 basis points – a level in excess of 100bps higher than its post-Covid low of July 2021. We see particular opportunities in sectors that have been hit hard, such as real estate (outside China), and tourism and leisure, including airlines, car rentals, and hotels & casinos.

Chinese visitors are the most prominent group at many tourism destinations in Asia. If we were to see even a very gradual rethinking of the very strict Covid measures prevailing in China, this would have a very material impact, not just in the world’s second-largest economy but across the entire region. The market has not yet priced in this possibility. Investors with a longer horizon can position themselves to benefit at an early stage.