Asia ex Japan Equities: Active Investing in a Structurally Dynamic Region

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Asia ex Japan Equities: Active Investing in a Structurally Driven Region

“The best time to plant a tree was 20 years ago. The second-best time is now.” Chinese proverb

The world’s economic center of gravity has shifted to the East. In just the last quarter-century, Asia’s phenomenal growth trajectory has dramatically reshaped the global economy, with an outsize contribution to incremental global growth and a rising share of global GDP. As the chart below shows, while other major regions have receded or struggled, Asia continues to scale new heights.

Asia’s Relevance in the Global Economy Has Grown Significantly

Source: World Bank, Bloomberg, PineBridge as of December 2019, accessed in February 2021. Asia consists of Vietnam, Thailand, Singapore, Philippines, Malaysia, Korea, Indonesia, India, Hong Kong, and mainland China. Euro consists of Spain, Slovenia, Slovak Republic, Portugal, Netherlands, Malta, Luxembourg, Lithuania, Italy, Ireland, Greece, Germany, France, Ireland, Estonia, Cyprus, Belgium, and Austria. Latam consists of Venezuela, Uruguay, Puerto Rico, Perú, Paraguay, Panamá, Nicaragua, México, Honduras, Haití, Guatemala, El Salvador, Ecuador, Dominican Republic, Cuba, Costa Rica, Colombia, Chile, Brazil, Bolivia, and Argentina. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

The investment potential is truly compelling. Asia is home to the world’s largest population of “digital natives,”1 will make up 40% of global consumption by 2040,2 and will add 1.2 billion people to urban areas between now and 2050.3 We believe the convergence of several powerful structural trends – including accelerating digitalization and automation, a rapid transition toward a lower-carbon economy, and an increasingly urban population (among other demographic changes) – will set the stage for a seismic shift in global economic dynamics that creates unique and compelling investment opportunities.

Connectivity despite diversity leads to a stronger Asia

Asia is a diverse region, with economies at varying stages of development, different political structures, socioeconomic systems, and demographic profiles, and widely divergent per capita income -– from US$1,000 in Nepal to over US$65,000 in Singapore.4 Yet economic cooperation has deepened in recent years, along with a boom in intraregional trade, driven by regional trading agreements. The strong economic cooperation within Asia is expected to provide a buffer against any cascading effects of rising geopolitical tensions. For instance, the region’s intraregional trade share remained stable at 57.5% in 2019, helping to offset potential slowing in trade growth. To put this in perspective, intraregional trade in North America and the European Union stood at 40.9% and 63.2%, respectively.5 These strong trade linkages may also usher in new opportunities as companies seek to build robust, self-contained regional supply chains to serve both Asian and global markets.

Intraregional Exchanges Have Increased in Recent Years

Source: Asian Development Bank as of February 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

The rise of Asia Inc.

Asia has become home to half of the world’s fastest-growing global companies6 across a wide range of sectors, including industrial, automotive, information technology, finance, and supply chain logistics. Forty percent of companies in the Fortune Global 500 are from East Asia, and three of the top 10 companies on the list are from China.7 Our ground research indicates that a vast majority of the companies we track have responded well to the tough business environment over the past two to three years through extensive de-risking, including cost-control measures, better inventory management, and disciplined capital expenditures. They have raised equity and fortified their balance sheets, helping them to withstand future shocks and to grow and innovate their businesses.

The Health of Asian Companies Is Improving

Operating Free Cash Flow Growth For Asia Ex Japan

Net Debt to Equity For Asia Ex Japan

Source: FactSet, PineBridge as of January 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any opinions, projections, forecasts, and forward-looking statements represent the view of the manager and are valid only as of the date of this presentation and are subject to change.

In short, Asia is diverse yet is unified by a common thread: an upward trajectory of economic growth. In such a market, we believe selectivity through active investing is key to getting the most out of the region’s opportunities.

The case for active investing in a region of big structural shifts

Indexes represent Asia’s past, not its future

Bellwether indexes do not truly represent the full extent of economic activities in Asia. A company’s presence in the index today typically reflects its “past glory” in terms of performance, which may not necessarily persist into the future given the amount of disruptive innovations, evolving reforms, and structural changes. That is why the stock markets have either lagged behind or barely matched the growth in underlying economies, even on a longer-term basis. In short, indexes have not been able to capture the changes in the broader economies.

For Over a Decade, Index Returns in Asia Have Lagged GDP Growth

Source: World Bank, Bloomberg, calculated based on data from end-2008 to end-2019. As starting points, we used the peak points achieved before the Global Financial Crisis hit these markets through 31 December 2020. The starting dates are as follows: MSCI China, 10 October 2007; MSCI India, 31 December 2007; MSCI Korea, 31 October 2007; MSCI Indonesia, 29 February 2008; and MSCI Malaysia, 31 December 2007.

Asia remains underrepresented in global benchmarks

Despite recent increases in the weightings of large Asian economies in global indexes, Asia ex Japan equities as a whole remain underrepresented. Companies outside North America accounted for less than 40% of the global MSCI ACWI’s market capitalization, but they contributed almost 70% of total revenues.8 The MSCI Emerging Markets Index accounts for 12.1% of the ACWI but contributed 42% of the ACWI’s global revenues, and four Asian economies (China, Taiwan, Korea, and India) account for three-fourths of the emerging market index’s weight.9 The disconnect between weighting and revenues supports the case for a standalone allocation to Asian equities and a more selective approach at the stock level.

Emerging Economies Deliver More Revenues to Key Indexes Despite Having Less Weight

Source: MSCI as of December 2020, accessed in February 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any views represent the opinion of the Investment Manager, are valid as of the date indicated, and are subject to change.

In a market of approximately 16,000 listed companies10 from diverse markets, sectors, and capitalizations, index replication imposes limits on investors’ opportunity sets. Moreover, Asia’s continually changing regulatory and governance environment, along with companies’ evolving business models, create pricing inefficiencies and thus large dispersions in returns over longer periods.

Free from the constraints of index weightings, an active, all-cap approach has the flexibility to adjust capital allocations amid changing company, industry, or macro dynamics – making it a potentially better fit for Asia’s growing markets.

Learn more about PineBridge’s unconstrained, all-caps Asia ex Japan Equity offering.

Footnotes

1 Digital natives are generally defined as persons born after 1980. We estimate the figure based on UN Population data for 2020. There are 3.5 billion people in Asia aged 49 years and under, more than any other region in the world.
2 See “The Future of Asia: Asian Flows and Networks are Defining the Next Phase of Globalization,” McKinsey, 18 September 2019. https://www.mckinsey.com/featured-insights/asia-pacific/the-future-of-asia-asian-flows-and-networks-are-defining-the-next-phase-of-globalization#:~:text=On%20consumption%2C%20in%202000%20Asia,39%20percent%20of%20global%20consumption
3 See “The Future of Asian and Pacific Cities,” United Nations Economic and Social Commission for Asia Pacific, 2019. https://www.unescap.org/sites/default/d8files/knowledge-products/Future%20of%20AP%20Cities%20Report%202019.pdf
4 World Bank data as of 2019. Measured by GDP per capita in current prices.
5 See “Asian Economic Integration Report 2021”, Asian Development Bank as of February 2021
6 See “Asia Is Home to 50% of the World’s Fastest-Growing Companies,” Nikkei Asia Review, 9 May 2019. https://asia.nikkei.com/Business/Companies/Asia-is-home-to-50-of-world-s-fastest-growing-companies
7See Fortune Global 500 List 2020, as of August 2020. https://fortune.com/global500/
8 MSCI as of December 2020.
9 MSCI as of December 2020.
10 Bloomberg as of 31 December 2020

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