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At our 2023 Asia Pacific Investment Forum, speakers addressed five topics they believe will shape Asia’s investment environment this year.
According to Head of Multi-Asset Strategy, APAC Nick Samouilhan, global markets are undergoing a tectonic shift away from the environment of the past three decades, to a new regime in which the trade-off between growth and inflation is intensified, and policy is consequently more constrained.
Higher input costs have arisen owing to the tight supply of commodities globally amid high demand. Businesses are building machinery and structures in new ways that demand more raw materials.
Regarding labour, talent shortages resulting from migration restrictions and policies that promote higher wages among locals are driving up labour costs, a contrast to the low-cost models of the past few decades.
These trends have manifold implications for investors. High interest rates and greater market volatility are likely to suppress global equity valuations. Additionally, the correlation between commodities and equities is in flux, while the assumption of a negative correlation between equities and bonds is in question. As such, investors may wish to turn to asset classes such as alternatives, commodities, and linkers for diversification.
Investors must also think about risk differently. It is likely that interest rates will rise further, and investors may need to allocate greater risk to their portfolios. They may also benefit from favouring stress testing over conventional value-at-risk analysis.
What we’re trying to achieve hasn’t changed. But the way we get there may have changed.
Valuations across the Asia ex Japan region are noteworthy, points out Equity Portfolio Manager Niraj Bhagwat, with many countries, such as China and South Korea, currently trading at or close to historic lows. Overall, the region is trading at a valuation discount to the US, Europe and Japan.
In India, valuations are typically at a premium to other markets in the region, but for much of the past three decades it has outperformed its rivals, and at times, even the US. It’s a market where, historically, high-quality, well-managed businesses have been able to thrive. Today, India is at the beginning of a significant economic cycle, and Niraj sees long-term opportunities across a range of sectors.
Other emerging markets in the region, such as Malaysia and Indonesia, are benefiting from higher commodity prices and geopolitical shifts as businesses consider diversifying supply chains away from China, where they’ve been concentrated.
When I think globally, I can’t think of another place other than Asia that is valued attractively, holds good balance sheets and boasts a robust growth profile.
Asia tech companies may offer attractive valuations and strong fundamentals, according to Global Industry Analyst Yash Patodia. China’s role in Asia technology remains significant, thanks to its accelerated reopening, relative economic strength versus developed markets and its easing regulatory landscape. During the COVID-induced lockdown, Chinese players tightened their cost structure, and now see faster profit growth. However, despite its prominence, China is only one piece of the opportunity set. Taiwan’s burgeoning semiconductor industry receives materials and components from Japan and South Korea, while India is home to a small but rapidly growing set of internet companies.
Both publicly listed companies and their private market peers present growth opportunities and unique benefits. In the public space, largely unknown Asian tech companies offer high growth potential as the building blocks for long-term secular trends, such as AI, cloud computing, mixed reality and automation. Conversely, in the privates space, novel business models that are able to capture new and untapped value are emerging. Investing in private companies can also be a way of accessing future leaders and areas where tech markets are less evolved, such as India and Southeast Asia.
In my view, investors may be overlooking compelling opportunities within equities in the Asian technology market.
Looking at financial markets through the traditional lens of asset classes, countries or sectors only brings a portion of the investment opportunities into focus. A thematic approach can help to identify a wider set of attractive opportunities, which tends to sit outside of traditional classification models. Thematic investments can focus on tomorrow’s investment opportunities and can be an effective source or return and diversification, asserts Portfolio Manager Dáire Dunne.
The move towards a more inclusive society is one such theme. Increasingly, we are seeing the demise of monopolies and industries that previously restricted new entrants. Sectors are also becoming more inclusive to end users as well. For example, we are seeing more universal access to health care, thanks to tech and new service models.
Another industry that is becoming more inclusive to end users is finance, where fintech innovation is making loans and insurance affordable to both providers and consumers. Lastly, in education, the provision of virtual learning is transforming how we learn. All three suggest compelling investment opportunities.
A second theme is sustainability. Unlike previous generations, much of today’s society is deeply concerned about environmental issues, be it climate change, the provision of water or social challenges like poverty and inequality. A noteworthy growth area is food. Almost 40% of food ends up as waste, and the industry needs solutions to make production more efficient, improve storage and boost recycling. Capital is already being channelled towards these causes, with many delivering returns in both financial and sustainability terms.
Another theme is innovation. Automation and robotics are already making their mark, especially in digitally advanced markets like Singapore. And it is worth noting that not all tech is being deployed in manufacturing and industrial settings. Restaurants and places of recreation are also onboard, as are providers of a vast array of automated services for homes and offices.
We’re moving from a concentrated growth model, which was the model of prior generations, to something more inclusive.
Last year was challenging for fixed income, where most sectors saw double-digit negative returns. This has led to more attractive starting yields and valuations today.
We expect central banks’ shift from quantitative easing (QE) to quantitative tightening (QT) to result in elevated volatility for markets. The Bank of Japan’s (BOJ’s) return to QE last year as part of its defence of the yield-curve-control band contributed to improved market conditions and performance. That said, we believe this dynamic will probably shift, and we expect a reversion to global QT later this year. Factors that could dictate liquidity in the year ahead include the BOJ exiting its yield-curve control and negative-interest-rate policy, the speed of the US Federal Reserve’s balance-sheet drawdown and longer-term policy decisions from the People’s Bank of China.
Price pressures present a challenging environment for bonds. As central banks try to control inflation, fragmentation between markets — globally as well as across Asia — could lead to less synchronisation among regions, industries and issuers. This, in and of itself, presents active opportunities that could potentially be exploited.
Over the next cycle, global macro strategies could potentially offer significant alpha that is uncorrelated to market beta and may help fulfil the diversifier role in portfolios.
In the shorter term, the China reopening story is going to benefit Asia much more than elsewhere. More broadly, higher all-in yields in fixed income provide attractive entry points, and elevated volatility increases active opportunities.
For Equity Strategist and Investment Director Philip Brooks, three markets hold much promise in both the near and long term. In his view, Chinese equities could rise significantly in the near term, on top of the solid gains they have seen since the nation’s reopening. However, caution should be exercised over the long term because, historically, China has not consistently created value for equity investors over long periods of time.
Although US equities declined last year, they are still more expensive than rival markets. By contrast, the emerging Asian markets look appealing. The outlook for these markets over the next 10 years is bullish thanks to attractive current valuations, rapidly rising innovation, low debt levels and the knock-on effects from the “China Plus One” strategy.
The region’s role in the global energy transition is noteworthy as well. The 10 largest producers of batteries — critical components of the renewable energy transition — are all based in Asia, while the majority of the world’s solar panels are made in the region.
Asia will soon become a major exporter of renewable energy technology to the rest of the world.
As the macroeconomic environment transforms, moving away from the low-inflation era, there are profound implications for markets and investment portfolios.
This is an important time for asset allocators to think about how they can seek to build a more resilient portfolio by focusing on differentiated return sources, opportunities in private assets, liquid alternatives, concentrated active strategies, thematic solutions with structural tailwinds and innovative sustainable investments.
Experts
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Toshiki Izumi, CFA, CMA