From New York to Shanghai to Singapore, stock markets around the world have worked themselves into a state of frenzy in recent months.
Equity values in China have soared close to the US$10 trillion milestone as it recovers from its biggest crash in history. But as investors continue to plough into the market, there’s the nagging worry that the rally is fuelled by risky trading – and that today’s exuberance may just be the beginning of another implosion.
So who will win, and who will lose? It’s hard to tell. The heightened and unprecedented volatility that has come with the Covid-19 pandemic has made it increasingly difficult to determine who will emerge victorious in the investing world. Biotech stocks, for instance, swing with every new step of progress towards a vaccine. But even pharmaceutical firm Gilead saw its shares fall 7 per cent despite making advancements with the antiviral drug Remdesivir.
In this new world, investors have to go in with their eyes wide open. This means investing not just based on Covid-19 trends, which may not last beyond a vaccine, but keeping an eye on long-term geopolitical developments that could reshape the world.
Inflation and hype
One clear victor in the Covid-19 crisis is the telehealth market. The pandemic has accelerated demand for such services, with the global market demand poised to hit a whopping US$175 billion by 2026. Chinese online healthcare platforms such as Ping An Good Doctor have seen a tenfold increase in newly-registered users. All is well and good, but exactly how sustainable is this growth?
At the same time, an influx of tech companies have jumped in to provide alternatives to certain services that have been well-received among investors. India’s Jio Platforms, for example, has received investments from big-name stakeholders like Facebook and an upcoming US$253 million investment from Intel – despite its video-conferencing platform JioMeet being a Zoom carbon-copy.
Investors appear to be buying into a “Me-Too Product” phenomenon –where companies compete by creating variations of a popular product or service – causing exponential growth in certain shares. However, this may not be cause for celebration just yet. For one thing, we have yet to see if the current valuations of such shares, propped up by substantial government funding and easy bank loans, will be sustainable post-pandemic. How many people will still opt for video conferencing over face-to-face meetings once this crisis passes?
On the other hand, some sectors might be grossly undervalued at the moment. Take the travel industry, which hasn’t stopped bleeding out since the start of the pandemic. Some airline shares are being valued at such low levels that they’re basically junk stocks.
However, on closer look, airline companies may not warrant such disregard: while they are changing operations to balance safety and profits, the prospect of recovery may not be off the table. Similar to what transpired after the 9/11 attacks, the “new normal” for air travel might not be vastly different from what we’re already familiar with. It could be just a matter of time, and a matter of picking the right company that has the resources to ride out the crisis.
The geopolitical picture
While the flurry of activity coursing through global stock markets today stems from the ongoing pandemic, it is important that investors look beyond that. Specifically, geopolitics remain an ever-important determinant, especially developments with impact that will last beyond Covid-19.
The US-China trade war has brought certain Chinese companies a change in fortunes, for instance. In the case of the “Semiconductor Cold War”, the Chinese government supported the country’s largest chipmaker SMIC – technologically five years behind the Taiwanese-held TSMC, which relies on the US’ software and intellectual property – with huge amounts of funding. When SMIC later debuted on Shanghai’s STAR Market after delisting from NASDAQ, its share price surged more than 200 per cent.
Physical conflicts are also adding to an increasingly volatile global economic landscape. Take the Sino-India border skirmish, which is dangerously close to becoming Asia’s top geopolitical risk. India has responded by banning 59 Chinese-owned apps, including Tiktok, whose largest foreign market is India.
The jury is still out on whether this conflict will take a toll on both countries in the long run. Indian tech corporations relying on Chinese investments could nosedive in value should their investors pull out, and vice versa. Then again, the conflict may push both countries to achieve technological self-sufficiency. Perhaps India may emerge as the next worthy opponent to the Chinese semiconductor industry.
Keeping close tabs on major government initiatives is imperative for us at IJK Capital. China’s two-child policy, for example, means education and infant products sectors stand out as solid investment options. Then there is also the electric vehicle (EV) industry, including EV battery suppliers, given that the Chinese government has been promoting EVs heavily.
The key here is that investors should continue to track geopolitical movements, and stay focused on the long game. There’s no doubt that Covid-19 has caused wild swings and opened up huge opportunities in the stock markets, but it will be geopolitics that will play a more defining role in reshaping our world.