For decades, pictures of factory workers toiling on assembly lines were the snapshots many Western investors kept in their minds about Asian economies. It’s time to develop a new image because the chapter of Asia as just a satellite of the West, producing goods at low cost for overseas consumers, has closed.
Today, Asia sees entrepreneurs building world-leading businesses, trade pacts facilitating both talent and cross-border commerce, and new Chinese capital, with its tech bent and Belt and Road linkages, helping to lift regional economies. Asia’s governments are also becoming innovators, deploying digital technology for healthcare, connectivity, and currencies. It all culminates in the potential to pull the world’s economic gravity Eastward.
This report examines the circumstances, opportunities, and risks that business leaders and investors looking at the region should take into account as Asia wields greater economic gravity in an increasingly multipolar world.
1 IMF, as of 30 September 2021
2 Asia includes Developing and Developed Asia; Europe includes the UK and the EU
3 https://worldpopulationreview.com/continents
4 https://www.weforum.org/agenda/2020/07/the-rise-of-the-asian-middle-class
5 ASEAN - Association of Southeast Asian Nations. https://www.mckinsey.com/featured-insights/asia-pacific/asias-future-is-now
6 https://www.ft.com/content/c33e95f4-6acc-11ea-a6ac-9122541af204
7 https://fortune.com/global500/
Michael Kelly, Global Head of Multi-Asset, and Mary Nicola, Portfolio Manager, Global Multi-Asset, share insights on the evolution of the global bookends of US and China as they have risen to become the twin engines of global growth.
Elizabeth Soon, Head of Asia ex-Japan Equities, shares exciting secular trends and quantum changes bubbling up, leading to the rise of new winners and losers across Asia's expanding equity universe.
Steven Oh, Global Head of Credit and Fixed Income, and Arthur Lau, Head of Asia ex-Japan Fixed Income, explore how Asia’s fourth wave of growth sees the market maturing and deepening, presenting constructive new fixed income opportunities.
The aperture by which international investors view Asia fixed income has widened. In recent years, this asset class has become a major component of the global emerging markets (EM) bond universe, particularly in high yield.
Beyond yield, the Asia fixed income market excites more than others because of the region’s underlying possibilities. In Asia’s fourth wave of growth, we see the market maturing and deepening, and engendering reforms in transparency, governance, and sustainability. Asia’s infrastructure build-out in areas such as intra-regional mobility and renewable power generation would require long-term financing. This is likely to be constructive for the market in terms of lengthening maturities, creating new benchmarks, and potentially ushering a new supply of sustainability-focused issuances. Capital-intensive operational transformations – from automation to supply-chain relocations — could catalyze further market growth.
Quality remains our focus. We take a more proactive role in seeking improvements in the nonfinancial aspects of our issuers’ operations. Through dialogue, we have nudged issuers to enact changes that could add value to their businesses over the long run. We note the increasing consciousness among corporates of their environmental footprint, as well as efforts toward greater community responsibility and strengthening governance through board diversity. One of the more remarkable developments in Asia amid the pandemic is the growth of the ESG-related bond market, which we expect to further gather momentum.
While investors like us commit to integrate ESG considerations in our investment process and effect incremental change over time, governments have not shied away from using powerful regulatory tools to hasten change. Over the past year, regulatory changes have impacted some issuers. By and large, we believe, however, that these reforms will result in greater market stability.
All this point to the importance of a thorough understanding of the Asian operating environment — the evolving policies and regulations, complex ownership structures, and governance issues — and further highlights the value of having on-the-ground, experienced research teams. These granular nuances that may only be discernable to those with local insights and investing experience could differentiate portfolio returns over the long run.
As active credit selectors with substantial resources on the ground in Asia, we believe we are well-placed to bridge the growing demand for this rising asset class. For over 20 years, our team has navigated the region's investment grade, high yield, local currency, and hard currency markets, across industries, economies, and issuer types and ratings, and built robust portfolios designed to deliver income, diversification, and capital preservation benefits for our clients.
Collectively, the 20 stock exchanges of Asia Pacific form a US$39 trillion regional market, with over 30,000 listed companies — each potentially able to capitalize on the exciting secular trends highlighted in this report.1 Despite the Covid-19 pandemic, the Asian equity investment universe expanded in 2020 with new companies going public, proving that even a once-in-a-lifetime global crisis cannot hold back Asia’s entrepreneurial energy.
The question for global investors is no longer whether to invest in Asia, but rather how best to uncover the winners of the future. With quantum changes bubbling up, we expect large dispersion of returns across Asian equities, which, in turn, sets up greater opportunities for alpha generation.
However, opportunity, without access and ability, would be a waste. In such a vast market, selectivity is important, and this starts with having access to the full opportunity set. In the past, investors had limited access to Asian equities partly due to foreign investor restrictions in domestic capital markets. Today, stock selectors can navigate the full breadth and depth of these markets across economies, market segments, industries, and market capitalizations via a flexible and unconstrained active investment approach — the cornerstone of our Asia equity strategies.
As bottom-up investors, we seek to find companies that can deliver consistent alpha over the long term by focusing on fundamentals — the strength and sustainability of their business models, the excellence of the people running them, and their valuations. Whether in Hong Kong or Mumbai, our locally based teams are constantly listening; gathering and deciphering information and insights and building up the research that supports our high-conviction stock calls. Indeed, being on the ground in Asia provided us with an unparalleled vantage point to see the unfolding Covid-19 pandemic and gather first-hand information on its impact not only on our investee companies but on global supply chains. Timely and effortlessly shared across the firm, this allowed us to position our global portfolios for the pandemic’s emerging risks as well as the rare investment opportunities as the region’s economies bounced back in no time.
As Asia’s regulatory and business landscape evolve and risk assumptions are reconfigured, having a robust process to assess financial as well as environmental, social, and governance (ESG) considerations will be critical because of the increasing materiality of these factors to investment performance. Government actions around climate change, social well-being, and transparency in Asia and elsewhere also signal the growing entrenchment of ESG in the policy agenda. Our investment process, which combines our proprietary lifecycle categorization research and equity risk assessment frameworks, fully integrates ESG and helps us capture the right long-term value-creating companies with strong and sustainable business models.
Over 30 years of cumulative experience in equity investing in the region has been fully integrated into our global investment process, creating a deep knowledge base from which we draw upon in our decision making, especially in topsy-turvy times.
With such long track records in Asia, one may wonder why are we still bullish about this region after all these years? Have we not harvested all the alpha by now? The answer is simple: the Asian growth story is open-ended — the region constantly reinvents itself, catalyzed by a seemingly inexhaustible entrepreneurial drive. With patience, discipline, and conviction, we believe our time-tested approach will rise up to the challenge of each new Asian metamorphosis.
1 World Federation of Exchanges as of end June 2021. These exchanges include Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam.
While global investors for years used to be conspicuously US centric, over the last decade they have come to focus on the global bookends (US and China) as the twin engines of global growth. And in a world short on growth, their focus continues to also recognize the tremendous opportunities throughout Asia.
The pandemic is just the latest reminder of the outsized impact Asia has on the rest of the world. Global supply chains revolve around Asian factories and logistics, which, during lockdowns early in the pandemic, meant intercontinental supply snarls. Those supply chains increasingly encompass world beating technology as well. With close to a billion workers in China and India joining the global workforce, Taiwan leading the world in semiconductor process technology, and rapid growth throughout the ASEAN nations, demand for certain products such as commodities, agricultural products, and luxury goods has now become so tethered to the region that effectively assessing sectors as wide ranging as metals and mining, consumer discretionary and staples, and semiconductors would call for acute knowledge of Asian trends. Clean energy opportunities, which are part of our “energy evolution basket,” have Asian footprints too – the biggest electric vehicle (EV) battery makers, for example, are in Asia (dominated by China, Korea, Japan).
Our Global Multi-Asset Team looks for opportunities across over 80 asset classes globally, yet Asia figures prominently in our investment decision making. Asia is full of opportunities and its fixed income markets continue to experience capital deepening. Asian companies and sovereigns form a significant component of several asset classes we follow and are key influencers in others. Two prominent dots on our radar that we think will influence market developments are China and global climate imperatives, which this report has incisively discussed.
Notwithstanding demographic pressures, Chinese policymakers are increasingly comfortable with a moderate growth target (i.e., quality over quantity) and are focused on more equitable growth as well as preventing excesses from posing risks to China in the longer term. Moderate growth in China is still world beating. The focus is on enhancing productivity through technological innovation as the gateway to prosperity for its aging population. Labor productivity and urbanization have been key drivers. Secular trends in China such as digitalization, rising wealth and consumption are firmly in place. Hence, a prudent consideration of the strategies leveraged to capture these enduring opportunities in China and emerging markets is needed.
Environmental, social, and governance (ESG) concerns now influence most investment decisions and are propelling investments in cleaner processes and procedures. Again, this trend circles back to Asia, not least because of its burgeoning EV industry, but also because the region will be one of the most heavily impacted by climate change. Another reason is the significant room for improvement on all three ESG components in the Asian asset classes we follow. The transition to renewables, new environmental regulations, and national-level emission reduction pledges are encouraging, albeit uneven, measures to narrow the lacuna between problem and remediation (China and India remain top 10 carbon emitters). We believe there is compelling multi-year opportunity in this ESG delta for discerning investors. While starting later, China is now seeking to achieve peak emissions in 2030, and carbon neutrality by 2060. This 30-year objective from peak to neutrality, compares to 60 years in Europe and 45 in the US, should all these countries achieve their stated objectives.
Having invested in Asia for a long time, what’s notable is how quickly change occurs. In this dynamic market, it is imperative to remain close to the ground, gather high-quality data, remain highly flexible, and collaborate with our specialist colleagues in Asian equities and fixed income to navigate the waves of opportunities as well as its potential spoilers.
Finland
