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ASI picks Asia as a Covid survivor

A fast response to coronavirus and positive structural trends will support Asian assets next year, according to Aberdeen Standard Investments (ASI).
Pruksa Iamthongthong, Aberdeen Standard Investments

Restrictions to freedom of movement and business activity have battered the earnings of Asian companies this year, and a revival of earnings growth in 2021 will depend on whether the world manages to defeat the Covid-19 virus, according to ASI.

“However, Asia remains home to many good quality companies, with clear earnings drivers, robust balance sheets, and healthy cash levels,” Pruksa Iamthongthong, senior investment director at ASI told a webinar yesterday.

She noted that consensus earnings growth forecasts for next year have risen sharply to about 26% for companies in the MSCI AC Asia Pacific ex-Japan index, and highlighted their “prudent balance sheets”, with net debt-to-equity significantly lower than in corporate Europe and the US, as well as their large cash piles, which provide high dividend payout potential.

Yet, the underweight allocation by global mutual funds to Asia compared with MSCI benchmarks is well below the 10-year average, which is “staggering”, according to Iamthongthong.

“The region is still one of the fastest-growing, with structural growth trends that will continue to play out for years to come, and investors mustn’t lose sight of the six investments themes that make Asia special,” said Iamthongthong.

These include the region’s rising affluence that is translating into a rapid growth in premium consumption, such as education, financial services and higher quality food and beverage; the widespread adoption of digital technology that “means a bright future for gaming, the internet, fintech and tech services”; and the rise of “tech enablers” which facilitate the rollout of 5G mobile networks, big data and digital interconnectivity.

In addition, urbanisation and an infrastructure boom are set “to benefit property developers and materials producers, such as the cement industry”; the region is home to a diverse range of companies leading advancements in biotech and medical device technology, and Asian companies will benefit from the “going green megatrend” through the supply of renewables and batteries.

Although the damaging effects of Covid-19 are likely to persist into 2021 and beyond, Iamthongthong identified four major issues that will present investors with both opportunities and risks in Asian markets.

Asia opportunities and risks

First, China’s increasing desire for self-reliance as a result of the external challenges it faced in 2020, namely supply chain exposed by the pandemic and exacerbated by trade tensions with the US.

“There are three areas of focus in China’s push for self-reliance: boosting domestic consumption; localisation of new technology, especially the advanced semiconductor technology that underpins 5G mobile networks; and the transition towards green energy,” said Iamthongthong.

Second, as the world’s largest oil importer, China wants to be less dependent on fossil fuels and is in the vanguard of the development of renewables to meet both its own and world demand for green technologies.

For example, China’s wind turbine-makers have some 26% of the global market; its battery-makers account for 78% of the world’s battery manufacturing capacity; the country is responsible for 91% of silicon wafer-production (used in harnessing solar energy), according to Iamthongthong.

“This presents long-term investment opportunities in the renewables supply chain that supports industries such as wind power, solar power and electric vehicles. Many of the companies within this renewables value chain are located in China,” she said.

Third,  Asia is coping better than other regions with the Covid-19 pandemic.

“The situation in Asia has been more encouraging. China, South Korea, Taiwan, Hong Kong, Australia and New Zealand – which together represent more than 85% of the benchmark MSCI AC Asia Pacific ex Japan Index – look set to suffer less damage than many economies because of their effective responses to the pandemic,” said Iamthongthong, although she does see economic risks in less developed countries such as India and Indonesia.

Finally, Asian policymakers have helped boost their economies through monetary and fiscal policy tools, but “have done so in moderation and have scope for further expansion”, said Iamthongthong.

“Moreover, countries within the region tend to be much better financed and governed than during earlier crises, and most now have stronger current accounts and healthier government debt-to-GDP numbers,” she said.

Identifying winners

Elsewhere in the world, “there are signs in the US, UK and Eurozone data that the speed of the recovery is already fading, and we cannot rule out double-dip recessions in some of the worst-affected countries and regions,” according to ASI’s chief economist, Jeremy Lawson, speaking on the webinar.

Jeremy Lawson, Aberdeen Standard Investments

Nevertheless, “the pandemic is accelerating some trends that were already underway before the crisis,” he said.

Examples include digital innovation and deployment, the slowing of globalisation, a shift towards fiscal policy as the primary tool of demand management, the way in which long-standing economic and social inequalities were eroding trust in political institutions and the quality of public policy choices, and the reinforcement of the “lower for longer” problem constraining aggregate asset returns, according to Lawson.

The pandemic is “also generating new trends not previously foreseen, such as transformations in patterns of work and travel, and the need for pandemic-resilient business, health and social models,” he said.

In this unstable environment, ASI intends to “draw on rigorous, forward-looking, thematic research that identifies the relative winners from post-Covid cyclical and structural change, and then tilting portfolios towards those companies, sectors, securities, indices and physical assets where the opportunities are greatest compared with what is already priced in,” said Lawson.

Part of the Mark Allen Group.