Covid-19 has become the new normal for economies globally, affecting the daily lives of billions of ordinary people and increasing pressure on governments to react swiftly and effectively to dampen the economic shock of the virus. As governments across the world weigh the decision to ease their lockdowns at varying extents and speeds, we have seen increased risks of new waves of infections.
For the countries we invest the bulk of our capital in (China, Australia, South Korea and Japan), infection rates have dropped precipitously off the back of strict regulations, lock-downs and the mandatory use of physical distancing and non-pharmaceutical interventions such as face masks and shields (Exhibit 1).
Exhibit 1: Daily new Covid-19 infections
Source: Our World in Data.
As infection rates have dropped, governments have felt more confident in resuming economic activity by easing lockdowns. With the partial reopening of most Asian economies, we believe the region is on the road to recovery from the initial economic shock of Covid-19. Asia felt the impact of Covid-19 almost two months ahead of the rest of the world, and we expect most of the negative impact (mainly due to full economic lockdowns) to be baked into Q1’20 financials.
Exhibit 2: China and Korea have likely seen their worst economic quarters
Source: USA Today; Our World in Data; Press Search.
China had locked down its economy in January and reopened early in Q2 (Exhibit 2). Meanwhile, Taiwan, South Korea and Japan managed to stabilize infection rates without having to impose countrywide lockdowns. Fortunately for PE investors, most of the dollars raised in Asia over the last 10 years have been concentrated in the countries that seem to have the first wave of Covid-19 most under control – China, Japan, South Korea, Australia/New Zealand (Exhibit 3).
Exhibit 3: Private equity funds raised by geography
Source: AVCJ, data as of May 18, 2020.
As infection rates drop, consumers have also felt more confident returning to work and daily activities. We can see this occurring by observing the mobility data generated by users of Apple and Android mobile phones. In the case of Japan, volumes of “driving” and “transit” map routing requests have already recovered to pre-Covid levels (Exhibit 4). Similarly, China has also seen a steady improvement in out-of-home activity (Exhibit 5).
Exhibit 4: Mobility data based on routing requests on Apple Maps
Source: Apple mobility data, data as of June 21, 2020.
Exhibit 5: Activities out of home in the past week (China)
Percent of respondents
Source: AlphaWise; Morgan Stanley.
Exhibit 6: Government stimulus measures
Source: Press search; KPMG; Australian Government Treasury.
Governments have also rolled out strong stimulus measures to support livelihoods (Exhibit 6). The economic cost of the first wave of Covid-19 has been large and keenly felt by governments across our markets. To preserve the progress they have made, and protect the economy, we expect that governments across our markets will continue to impose strict virus-related protocols, including occasional targeted quarantines, physical distancing regulations, and internal and external travel restrictions, amongst others. In the new normal, we should expect occasional targeted lockdowns. For example, China reacted quickly in the wake of the outbreak in Beijing on June 14, 2020 by sealing off certain neighborhoods and closing Xinfadi, the vast wholesale market believed to be the center of the outbreak. Thus, we expect that some offline businesses (e.g. travel, tourism, food, etc.) will unlikely be able to operate at full capacity in 2020 due to social distancing regulations. This will drive the need for businesses to adapt their business models.
Conversely, Covid-19 is also a great accelerator of the move online. Consumers across all age groups have been forced online and have found convenience in apps for buying daily necessities and other household items (Exhibit 7). This has seen China’s online payment penetration spike in Q1’20, while the time spent on the top 3 e-commerce platforms has grown by 22% compared to the same quarter a year ago. Patients have also moved to e-health platforms (Exhibit 8), while businesses have accelerated their shift to cloud and remote working, with China’s cloud infrastructure services market growing 67% in Q1’20, according to research firm Canalys.
Exhibit 7: Increased online payment and e-commerce penetration in China
Source: CNNIC; BofA Global Research; Goldman Sachs; QuestMobile.
Exhibit 8: Spike in adoption of e-medicine services in China
Source: Bain & Company; Company data.
Overall, private equity in Asia has held up reasonably well compared to the public markets, partially due to PE’s increasing overweight in defensive non-cyclical industries. In the chart below, the light blue area reflects the total deal value in non-cyclical sectors, making up two-thirds of total deal value in 2019, a significant uplift from only 32% a decade ago (Exhibit 9). Much of this is due to the increased exposure to information technology and computer related deals, which saw a 20.8% and 4.6% rise in deal share, respectively.
Exhibit 9: Asia Private Equity has become increasingly defensive over the last decade
Source: AVCJ, data retrieved on May 19, 2020; Morningstar.