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Following a year of severe disruption, 2021 emerged with renewed optimism. The rolling out of coronavirus vaccines, a new US president, and a refocus of climate action — among other macroeconomic events — bode well for the financial markets, especially in Asia.
The much-talked-about “K-shaped” recovery, where factions of the global economy surge forward while others stagnate, might also describe bifurcated performance in the financial markets. On one hand, equities recovered quickly in the wake of the crash in March 2020, with many indices hitting record highs. On the other hand, bond performance has been mostly subdued, with rates still hovering near all-time lows.
At the recent Wellington Management APAC Investment Forum, experts from the firm shared their views on how last year’s events are impacting today’s investment environment, and what investors can expect in the months ahead. Below are 10 trends Wellington believes Asia-based investors should watch closely in 2021.
Accounting for about half of the global economy1, and more than half of the world’s population2, the region’s economic recovery is well underway. China GDP is expected to increase by 7% this year, with the economies of India and Southeast Asia expected to grow by 8% and 5.2%, respectively3. “Asia is going to be fertile ground for investment opportunities, especially as the region integrates through trade agreements like RCEP,” enthused Santiago Millán, China thematic and macro strategist. “There’s so much change happening here already, and all of it is investible.”
The proliferation of advanced technology across the region is driving growth among local businesses. Whether it’s semiconductor production, food delivery services, or car manufacturing, technology-focused or enabled Asian companies are thriving. Their success is not just about technological advancements; understanding cultural nuances is equally as contributive — a quality that many Western companies often neglect. “As we look at Asian companies, both private and publicly listed, we think opportunities will expand exponentially going forward,” said Yash Patodia, global industry analyst and portfolio manager, who specializes in software and internet sectors.
According to Niraj Bhagwat, equity portfolio manager, by focusing on just growth or value, other important considerations like the environment might be compromised. To consistently deliver alpha over the longer term, quality companies must offer high return on capital, hold a significant competitive advantage, possess a robust governance framework, and align with high social and environmental standards.
Across the capital markets, fixed income investments traditionally have offered downside protection against losses from higher risk assets, moderate total return, and income. Yet given today’s near-zero interest rates across most markets, access to moderate total returns is limited. “Investors should consider fixed income solutions that address today’s return, diversification, and liquidity challenges,” outlined Jolyn Dang, director of Alternative Investments for Asia. “This is why alternative fixed income investments should be looked at as part of a well-structured asset allocation program.”
The fragmented and volatile nature of fixed income markets requires strategies that allow investors to move from opportunity to opportunity. A further consideration is the differing speeds at which markets are emerging from the pandemic, with monetary policies expected to diverge in the future. Today’s environment better suits active opportunistic fixed income management over a passive approach, according to Nick Samouilhan, multi-asset strategist and portfolio manager, and Tanya Sanwal, associate director of Investment Product & Fund Strategies.
Under the previous US government, friction between the world’s two superpowers soared across many matters, including trade, intellectual property protection, technology, defense, and more. While the current Biden-Harris administration is less antagonistic and holds a wealth of diplomatic experience, tensions will nonetheless continue, noted Thomas Mucha, geopolitical strategist. Measures such as trade tariffs and export bans are likely to remain in some form amid a long-term geopolitical dynamic characterized by great-power competition.
Despite their many differences, the governments of China and the US are aligned on climate action, added Mucha. Both aspire to drastically reduce emissions by prioritizing green investments such as renewable energy over conventional solutions. However, the likelihood of a more concerted approach remains minimal — not just because of ongoing tensions with the US, but also due to territorial disputes between neighboring India and Southeast Asia — both strategic US allies — over swathes of land and sea.
As climate change worsens and associated risks intensify, investors must future-proof their portfolios to mitigate the potential financial fallout from extreme weather events, wildfires, rising sea levels, climate-induced human migration, and more. “Using predictive modeling co-developed with Woodwell Climate Research Center, Wellington Management has identified issuers that are susceptible to future climate risks; found others that could benefit from the impact of climate change; and engaged with management teams of issuers to help them better understand and mitigate future climate risks,” explained Andrew Sharp-Paul, investment director of Investment Product & Fund Strategies.
According to Alan Hsu, Global Industry Analyst and Portfolio Manager specializing in utilities and clean technology sectors, investors are capitalizing on three areas: climate mitigation, by investing in technologies that help reduce emissions; climate adaption, by allocating capital to solutions that help economies and societies adjust to new climatic conditions; and lastly, climate migration, where funds can help build green cities and infrastructure to cater to residents avoiding extreme weather conditions elsewhere.
While 2020 saw increased interest globally in ESG investing, awareness in Asia remains somewhat nascent. Increasingly, however, notable examples are emerging, with top-performing companies able to charge a premium for asset issuances. “The ‘E’, ‘S’, and ‘G’ work very well in helping to identify high-quality companies that we believe will be long-term winners,” explained Bhagwat.
As the region continues to grow economically, and as companies and portfolio managers increasingly adopt ESG principles, Asia stands to benefit from growing investor interest, not only from within, but from investors further afield as well.
To learn more about the wide range of Wellington Management solutions available to investors in Asia, please contact us.
A great-power world: A discussion on the future of Sino-US policies and global diplomacy in 2021
Thomas Mucha, Geopolitical Strategist
Santiago Millán, CFA, Macro Strategist
Marketa Dvorak (Moderator), Managing Director, Global Wealth Management
Geopolitics will remain an important feature of markets and macroeconomics in 2021 and the most important geopolitical dynamic to watch in 2021 will be the US approach to China. In a Joe Biden administration, how does the policy direction change and what are the macro and geopolitical impacts on US-China relations? From geopolitical perspectives, 2021 investment implications by asset class levels will be addressed.
Rethinking fixed income through traditional and alternative lens
Nick Samouilhan, PhD, CFA, FRM, Multi-Asset Strategist and Portfolio Manager
Tanya Sanwal, Associate Director, Investment Product & Fund Strategies
Jolyn Dang, Director, Alternative Investments, APAC
Sashi Nambiar (Moderator), Managing Director, Global Wealth Management
While bonds have historically played the primary and protective role in a portfolio, they have less protective potential than in the past and may offer this reduced potential at a higher cost. As such, many investors are interested in ways to enhance the protective qualities that bonds offer and complement them with other downside mitigation strategies. So, what is the framework for seeking downside mitigation? And what are the most compelling opportunities for traditional and alternative fixed income?
Case for Asia: The innovation superpower
Niraj Bhagwat, CA, Equity Portfolio Manager
Yash Patodia, Global Industry Analyst and Portfolio Manager
Philip Brooks (Moderator), CFA, Investment Director, Investment Product & Fund Strategies
After a decade of the US leading global stock market performance, we believe a transition is now underway. In our view, Asia today has better fundamentals than any other region. Having navigated the global pandemic relatively well, we believe Asia is better positioned to benefit from the recovery of the global economy as we move into a post-COVID world. Join us in an engaging 30-minute dialogue with Philip, Niraj, and Yash on our outlook and insights on Asia equities and technology.
Brewing storm: Are investors discounting climate risks and opportunities?
Alan Hsu, Global Industry Analyst and Portfolio Manager
Andrew Sharp-Paul (Moderator), Investment Director, Investment Product & Fund Strategies
As the transition to a lower carbon economy continues, we expect markets to begin repricing assets accordingly. In collaboration with Woodwell Climate Research Center, a leading climate science think tank, we have been researching the physical effects of climate change on capital markets and are integrating those findings into our investment practices. Join Alan and Andrew as they give an overview of our Sustainable Investment and Climate Research platforms and a deep dive on where we see the most interesting opportunities in this long-term secular trend.