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Jupiter AM prefers developed markets in Asia

Inflation will remain elevated in Asia Pacific next year, so companies with greater pricing power are likely to offer better returns, according to Jupiter Asset Management.
View of the Taipei Skyline with Taipei 101 at night

Many Asia Pacific stock markets delivered strong returns in 2021, as economic activity resumed and investors switched their focus to a post-Covid world. As a result, stock markets are now looking quite expensive approaching the end of 2021, Jason Pidcock, head of strategy of Asian income at Jupiter AM, said in a report.

However, the region remains an attractive place for both growth and income investment opportunities. Identifying companies that are willing and able to pay dividends remains a crucial element of Jupiter AM’s investment strategy, he said.

Growth in dividends from Asia Pacific companies is expected next year, partly because of this year’s earnings growth, as well as likely continued earnings growth next year. Real interest rates are likely to remain low in many countries around the world for some time yet, adding to the appeal of equity income strategies.

I expect inflation to remain elevated for some time – it will likely be higher than it’s been for a couple of decades, and I think it will remain so throughout 2022,” Pidcock said.

Higher inflation means not only a squeeze on consumers’ pockets, but also on businesses and there are already effects coming through this year, he explained.

Pidcock stressed it is more important than ever to identify companies with pricing power and sales resilience, along with strong balance sheets. As inflation rises, businesses must increase prices to avoid their margins being squeezed, so investors need to focus on those companies that can do so while not reducing demand.

If interest rates are hiked and credit costs pick up, strong balance sheets are also very important; companies with low debt levels will be able to cope best in this environment, he added.

Sector and country bets

On a sector level, Jupiter AM prefers consumer staples. Price increases mean the average consumer will be forced to spend a greater proportion of their income on necessities, leaving less for discretionary items.

The asset manager also likes the technology sector. Taiwan, in particular, is home to some of the world’s most successful and exciting technology companies. Some of these businesses are highly innovative due to heavy spending on research and development, and several names in the sector can offer significant growth opportunities while also paying attractive dividend yields, said Pidcock.

Elsewhere, Australia is home to many excellent financial services companies, as well as offering numerous large natural resources companies, along with many industrial and infrastructure businesses which are arguably world class, he said.

On the other hand, Chinese equities have fallen sharply this past year, but Pidcock believes they are now cheap for a reason. He remains cautious about investing there given a range of concerns, from geopolitical risks to significant government interference. While the consensus view is for China’s GDP to grow around 5% next year, Jupiter AM sees growth could be weaker than that, partly due to its zero-tolerance policy towards Covid.

“When considering country allocations, I take environmental risks into consideration too. As such, I am more cautious about investing in Southeast Asia and the Indian subcontinent, where these risks are potentially higher, favouring more developed countries like Australia, Taiwan and Singapore,” he said.

Part of the Mark Allen Group.