A look at the opportunities in 2021

Caroline: The Covid pandemic has created a large amount of uncertainty in near term supply and demand trends within many industries, which is likely to continue. Nevertheless, the macro uncertainty should mean that ongoing stimulus is provided, offering further liquidity to global markets and maintaining low interest rates. These factors lead us to believe that equities have the opportunity to continue to outperform.

The impacts of the pandemic have highlighted the importance of increasing resilience in food and water security, healthcare systems and supply chains, as well as heightened awareness of topics such as climate change, biodiversity and workers’ rights. Whilst we already invest and engage on these topics, we hope that this increased consciousness endures and leads to further investment and innovation. With the EU Green Deal in Europe and the election of a more environmentally focused president in the US, we hope that governments worldwide will utilise economic stimulus to help support businesses that are providing solutions to such needs of society and the environment as outlined by the United Nation’s Sustainable Development Goals (UN SDG).

Phil: We remain optimistic on the themes of growth and innovation in the Asian equity market for 2021. Growth has been a long running theme in Asian markets, as seen 15 years ago within infrastructure, and 10 years ago with consumer themes. We believe that the next wave will be Asia’s growing global champions as there are an ample number of companies that fit into this upcoming opportunity.

There have been two inherent obstacles when pursuing a growth style investment. The first was China’s oversupply in infrastructure and real estate, while the second was the Trump administration’s fueled tensions with China. We believe that these obstacles will damper from 2021 onwards. With a Biden victory, we anticipate a more conciliatory tone towards China, in addition to less volatility compared to the Trump administration. Meanwhile, China’s over investment risk has been gradually absorbed through its government’s risk reduction policies. An example of this is China’s success in curbing property prices in the last four years, driving down risk concerns for the property sector.

When looking at past themes like infrastructure and consumption, the opportunity may have been obvious to investors now that it has already emerged. However, the upcoming theme on global champions has not yet been uncovered within emerging countries. Owing to a pool of highly-educated talent in Asia as well as its decade long emphasis on higher education, this has propelled the availability of quality labour as a resource.

In Korea, the higher education attainment ratio has exceeded 70% among those aged 18-22 years, claiming the title of the world’s highest educated country. The improvement in China’s human capital is also impressive. The tertiary attainment ratio in China among 18-22 year olds rose from 10% in 2000 to 50% in 2019. The acceleration in this ratio was completely unprecedented. The catalyst widened and cheap high-end talent pool became the back bone of Asia corporate’s emergence in global market.

Marco: The starting point for 2021 is more challenging in terms of valuations as the stock market continues to reach new highs globally. For the first half this year, we see continued easy monetary conditions, but are watchful of any financial tightening that may ensue in the second half. Financial tightening conditions may not necessarily be from PBoC action, it could be a reversal of dollar weakness, energy price escalations and/or financial market corrections.

More obvious differences between 2020 and 2021 are Covid-19 and the Biden administration. The pandemic caused a significant slowdown in the Chinese economy in Q1 2020. In contrast, there will be a corresponding spike in year-on-year growth in Q1 2021. As the rest of the world slowly re-opens their economies, China will benefit from the secondary effect of greater global demand for its goods.

With regard to the new Biden administration, whilst we do not expect a step change in Sino-US relations, they should be more predictable and constructive. One interesting aspect of the US’s recent aggressive policy towards China is that it has prompted Beijing to reduce its reliance on foreign producers. Consequently, the Chinese state is providing significant support to ensure that China is not only dominant but also increasingly independent in a number of key industries. Examples include semiconductors, cloud computing, and clean energy. China is now aiming for carbon neutrality by 2060 and is highly likely to exceed this target. In order to achieve this, China’s new Five Year Plan has aggressive environmental targets. These provide strong top-down tailwinds for clean energy companies, which often trade at significant discounts to their developed market peers.

Caroline: We believe that the most successful companies of the future will be those that help resolve the most pressing needs of society. For example, with many countries setting ambitious targets to reduce carbon emissions, we expect to see a continued increase in investment into green infrastructure and more sustainable technologies. For us, climate change is a key mega-trend and we see renewable energy, electric vehicles and energy efficient housing as some areas providing clear impact and investment opportunities.

Elsewhere, companies that provide innovative solutions towards better food and water security, healthcare innovations and those that help reduce material use or provide a more circular economy should also be exposed to growing demand.

With increased end-client awareness of global environmental issues, such as climate change and diminishing biodiversity, we hope that the trend towards “investing for good” continues, with impact investing providing the purest opportunity to do so.

Phil: We believe that we will continue to see industries and companies enjoy high growth in the coming years. For 2021, we are particularly optimistic on growth themes within semiconductors, clean energy, EV batteries, AI applications, and software businesses in Asia.

Country-wise, we think that North Asian, including China, Taiwan, Korea and Vietnam, is full of growth themes; while Asean and Indian markets may not identify the same true growth stories. We believe the effects of Covid have largely impacted these markets the most.

Marco: There are four key themes that we are particularly excited about within China. First, the “domestification” of many parts of the technology industry is providing attractive opportunities within China – semiconductors and cloud computing are two such areas that we have exposure to.

Second, we also like Chinese real estate, where many companies are extremely cheap by historical standards and have strong cyclical exposure to the economic recovery. Property management names also have favourable government policy support. The valuations of the real estate sector and property management sector are at multi year lows, which helps to balance out the portfolio level valuations and offers downside protection should tech/growth correct.

Third, the green economy has a huge policy tailwind and we continue to play it in the portfolio – solar, wind, electricity infrastructure, electric vehicles & their supply chains are all likely to enjoy strong growth for many years to come.

Lastly, China is the world’s largest consumer – as the country becomes wealthier, people are seeking more premium goods and services. Such premiumisation, particularly in lower tiered cities, is a key theme for the fund.

Caroline: We have been investing in such themes since the inception of the strategy, which means the portfolio is positioned to gain from the opportunities presented by these trends. Therefore, while we have not made any major changes since late 2020, we have continued to search for interesting new ideas and added a few new names to the portfolio, including a leader in fuel cell technology for heavy duty vehicles, a company which is using technology to increase knowledge and efficiency of energy supply, a provider of effective building insulation and a company producing a fully biodegradable and renewable alternative to plastic.

Phil: When we engage in portfolio rebalancing, we take in account two major aspects that is dynamic change in competitiveness and valuation levels.

The competitiveness analysis is the most important aspect and skillset to follow the Asian growth story. Fortunately, in Asia, there are many globally competitive companies, ranging from tech manufacturing, solar, EV to chip foundries. We have witnessed great opportunities and are content to hold these names until they reach their intrinsic value.

By year-end of 2020, we were cautious of elevated valuation multiples on certain themes that took a hard rally, thus decided to take profits from names that outperformed. Though it is not a hard rule, we attempt to keep the average PER below 25 times. This helps the PM prepare for the event of a market correction and encourages the Fund to identify underappreciated growth stocks across the region.

Marco: Our process combines both top-down and bottom-up research, with our top-down process focusing our bottom-up research agenda on the areas of the market that we expect to derive the greatest benefit from the economic and political themes that we have identified.

We are most overweight technology and industrials, and these have been increased in early 2021. The former provides strong secular growth and also plays into the domestification theme, especially in cloud computing. Examples in the portfolio include Kingsoft Cloud and 21Vianet. The overweight exposure in industrials is partly a reflection of our pro-cyclical stance, as well as our preference for companies providing leading green technologies. We own smart grid company Nari Technology in addition to Weichai Power and Beijing Sinohytec, which both offer attractive exposure to hydrogen and fuel cells.