18 Oct 2023
We all know Asia is the largest continent on earth, both in terms of land area and population. However, economically, the region stands out too, with some of the world’s fastest-growing economies, including China, India and Indonesia. According to the International Monetary Fund, Asia is estimated to contribute around 70% of global growth this year.1
As well as dynamic economies, Asia is also home to many world-leading, innovative businesses in fields as diverse as banking, automotive, renewables and technology.
The balance of the world economy is arguably shifting eastwards. And yet, despite Asia’s bright prospects, especially compared with the some of the challenges faced by the West, we believe many investors overlook the potential opportunities that lie in this large and diverse region.
Recent developments in China have arguably influenced investor sentiment towards Asia, along with concerns about the region’s vulnerability to US interest rate rises and the US dollar.
But, from the perspective of long-term stockpickers, we believe that the current negative sentiment and stockmarket weakness could present interesting opportunities for investors who can look beyond near-term uncertainty.
As the world’s second-largest economy, China’s fortunes have a significant impact on the rest of the world, as well as its Asian neighbours.
This year, worries about a slowdown in China’s economy, including problems in the indebted property sector, and ongoing geopolitical tensions with the US over issues such as trade and Taiwan have been a drag on the Chinese equity market. These factors have added to investors’ nervousness about Chinese policymaking, following unexpected government crackdowns on technology firms and education providers in recent years.
The sense of disappointment about China’s reopening after the removal of COVID-19 restrictions has also played a part. However, we suggest that investors and commentators got ahead of themselves about the reopening and the potential impact it would have.
For instance, there were notable differences between China’s COVID experience and those in the West – there were no financial handouts for households, for example, and China didn’t completely lock down either. There were localised lockdowns including entire cities such as Shanghai, but many factories kept working throughout the pandemic. This meant there was unlikely to be the same bounce back in the manufacturing sectors of the economy when the restrictions were lifted.
Where we have seen a rebound is in the services sector –demand for travel and restaurants has been much stronger this year than 12 months’ ago. Healthy retail sales figures provide some encouragement that the government’s goal of moving towards a consumption-driven economy is making progress.
The real estate sector is the biggest challenge facing China today, in our view. The property market represents around a quarter of economic activity and is a critical driver of China’s economy.
Over the past few years, the property sector has been through a material and painful adjustment as policymakers have set out to curb rising prices, reduce debt levels and shrink the sector’s importance to the economy. Deliberate efforts to tackle the problem have led to a painful correction in the sector, which has had a direct impact on economic activity and the wealth effect (as falling asset prices make consumers feel poorer).
There was initial concern about the Chinese government’s perceived hesitance to support the economy. However, we have had numerous incremental policy measures, including mortgage rate reductions, fiscal easing and cuts in bank rates. In July, the Politburo of the Communist Party pledged to increase support for the economy with a series of reforms, which we believe was an important signal.
There is now an increased sense of urgency and focus and we expect to see further policy easing geared towards increasing consumer activity and boosting the wealth effect by stabilising the property market. With low inflation and a large current account surplus, we believe that policymakers in China have plenty of flexibility to support the economy as required.
While there are risks associated with investing in China today, we believe the uncertainty is creating attractive long-term opportunities to buy very good companies at lowly valuations The government wants the economy to become less dependent on the real estate sector and the shift to new growth engines such as the energy transition is likely, in our view, to present many opportunities in areas such as solar, wind power, electric vehicles (EVs) and supply chain management.
The market already offers world-leading firms in environmentally friendly technologies such as solar panels and EVs, which will likely have a tangible impact on global markets over the next decade.
We are also seeing encouraging signs emerge, regarding improved shareholder returns, state-owned companies increasing dividend payments, and private-sector internet companies cutting costs and undertaking aggressive stock buybacks.
In times of uncertainty and negative sentiment, stocks often get sold indiscriminately across the board, which can create a fertile environment to identify undervalued companies. By embracing a long-term perspective, we believe there are fantastic opportunities to find attractively valued Chinese companies that can potentially participate in these positive future trends.
If we zoom out from China, we are greatly encouraged by developments across the region. Most Asian currencies are no longer dollar pegged (unlike before the Asian financial crisis), which has given policymakers free agency to strategically use currency depreciation to boost exports and increase competitiveness.
South Korea has benefited from this with the won today trading near cyclical lows on a real effective exchange rate (REER) basis. Alongside a lowly valued currency, we find stock-specific equity valuations to be attractive here.
In our view, there are many interesting, less mainstream markets to discover in Asia, like Indonesia. This is a fast-growing economy with favorable demographics. The country is benefiting from infrastructure spending and demand for minerals used in the energy transition. The country’s banks are well run, in our view, and there is scope for credit growth as the economy develops and financial penetration grows.
India offers a broad and deep opportunity set, spanning a wide range of sectors such as automotive, cement, hospital, infrastructure and financial services. There is a lot of dispersion in each of these sectors and we believe it is an excellent hunting ground for long-term investors who undertake rigorous company analysis and understand the risk of ownership.
When it comes to finding opportunities across Asia, we follow a well-established, valuation-focused stockpicking process. We look for situations where a specific debate or controversy (or lack thereof) has driven a large wedge between the price and what we believe to be the value of a stock.
We believe that conviction is critical to successful investing. To achieve this, we select investments from our core research universe, a carefully curated list of more than 450 companies in Asia ex Japan that we have been tracking in some cases for more than 30 years.
Our company analysis focuses on attempting to gain a superior perspective on a business and its risk of ownership. We have an experienced, diverse team of investment professionals, with a deep knowledge of Asian markets (gained by living or having lived in the region) and, critically, a long-shared working history.
A key element of our approach is “value-added shareholder ownership”. We always try and think like business owners. We interact with management in the manner of respectful humility; we make suggestions about issues where we feel we have a good knowledge base and can value to the company.
Importantly, we do not forecast the future. However, given the current pessimism about China, we believe the exciting long-term prospects of Asia are being overlooked, creating attractive opportunities for patient, selective investors.
The value of investments will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast.
1International Monetary Fund, Regional Economic Outlook for Asia and Pacific, May 2023
By David Perrett, Co-Head of Asia Pacific Equities
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.