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As China’s economy powers back up, it may be time to start thinking about a recovery for Asia’s beaten-down equity markets. But with all the uncertainties, two questions loom large. Could markets quickly bounce back to where they were at the start of the year or will it be a far slower path? And secondly, what will the world look like after a recovery? For instance, could work-from-home become the new normal?

We don’t have answers to these questions. But having established that these two factors that will shape a recovery, we can use them to sketch out four related investment scenarios:

“Fast recovery back to normal”. Markets rally to start-of-2020 levels and COVID-19 has no impact on the way we work, shop or invest. If this is your assumption, you may look at stocks that have fallen the most, have high debt levels and are possibly smaller companies, as these have fallen more than others. Southeast Asia markets in particular fit this category, as they have been hit the hardest in Asia.

“Fast recovery to a changed world”. The approach here is to look at stocks that have fallen considerably but maybe not as much as the distressed stocks mentioned above. We also look for companies that have a balance sheet that is in better shape.

“Slow recovery to normal”. For this scenario we select high-quality companies – such as those with higher and more reliable profits or low debt loads – that are now available at lower prices.

“Slow recovery to a changed world”. In this case, we need to identify what the new normal is. For example, people might do more video conferencing and need faster internet speeds at home. Companies could speed up automation plans or put new telecommunication infrastructure in place, such as 5G equipment or base stations. Based on this, we would look at companies that drive these changes.

Our base case is that the recovery will take some time and that there will be some changes in the way we act and behave, but in many other matters we will also fall back to our normal behaviour before the crisis.

First published 6 April 2020.

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