Asia is now clearly emerging from its historic position as the “workshop of the world” towards a millennial and services based set of economies, firmly underpinned by structural reforms across China, India and the other major countries. Reliance on the US is diminishing, and inter-regional trade and other relationships are being developed alongside the “One Belt, One Road” initiative from China. There are many themes which capture my attention:
ESG investing on the rise
Whilst Europe has been at the forefront of change in the kinds of fiduciary duties which investment managers should incorporate into their investment processes and responsibilities, Asia has been a laggard till now. However, it is clear both at the government and at the corporate level, Environmental, Social and Governance (ESG) is becoming a focus and a differentiator of returns. In Japan, the Abe government and its major pension funds are pressing for improved diversity, shareholder representation and management accountability which is resulting in better returns to shareholders through dividends and share buybacks (from very lazy cash-rich balance sheets).
In China, the “growth at any cost” model of the last 25 years is under rapid change because President Xi now knows it is crucial for him to deliver better living standards, less environmental degradation and more social inclusion and opportunity. Moreover, it was a surprise to many that many Chinese listed companies are no worse than Asian companies listed across the region with respect to ESG metrics.
Indeed China may not be a democracy but the power of the people is evident in the availability of apps which tell of the quality of the air! India too, whilst still reliant on the consumption of domestic coal, is keenly aware of the unpopular costs of growth at the expense of the environment, since so many Indians are still farmers. We expect these ESG themes to continue to gain momentum in Asia and encourage best practices to be adopted as markets develop and deepen.
Politics is playing a key role in the emergence of ESG, as above, as corruption and poor governance increase the costs of economic growth. Importantly, Asian governments appreciate the need to adapt their economic business models, since supplying products to tapped-out US and European consumers will not work much longer.
China is now concentrating of the themes of growth, stability and reform and is set to structurally rebalance its economy away from exports and manufacturing towards consumption and services, which is already evident in the falling spending on consumer needs and essentials, leaving a growing discretionary spending segment. It is important to note that Asian democracy may never resemble the West, as even Lee Kuan Yew of Singapore did not applaud the expensive health and welfare systems of Europe and the US.
Investing in Asia cannot avoid the “topic du jour” of growing trade friction from the US. Trade wars are positive for none and Asia is exposed to this more than most economic regions, given that Japan, China, South Korea and many others are big exporters, as well as Germany. US and Asian rebalancing was expected to occur over time as Asia pursued more inter-regional trade and as domestic consumption picked up over the next few years as the Asian millennial grew up.
However this rebalancing was not going to be quick enough for President Trump and his key focus for now seems to be on China. Yet, with regional efficient supply chains, Asia as a whole will be affected by this trade friction especially as it seems to be increasingly targeted on Chinese technology which is as indelibly linked with South Korea, Taiwan and elsewhere as the US is. Asia will in 2018 or 2019 become the largest investor in research and design globally and this investment competition could be seen as the next “Starwars” competitive theme with the US.
Regardless, China and other Asian nations will continue to ramp up investments as they see technological solutions to many growth challenges as essential for their futures. Indeed, as Asian economies move from needs to wants, given a 4.5 billion population, it is essential that the region delivers strong solutions to the challenges of food availability, housing, healthcare and education.
China has been taking slow and measured steps to opening up its currency, bond and equity markets to international investors. It has, however, learned the lessons of the late 1990s when unbridled access to global markets could be good and then a very bad thing. Thus there has been a deliberate and slow process of allowing investment into China which has also partly been used to control the flight of capital from China. But the direction of travel is clear and the market reforms are working well and being expanded in progressive steps.
Indeed, from being able to almost completely ignore China equities as an EM investment opportunity, global investors are able to consider this more seriously since China A-Shares will be included in many indices over this summer, offering a glimpse of the potential of US$12 trillion corporate market cap. Additionally known as a kind of financial casino, China is improving its regulation and rules so that all investors see more credibility and transparency from the markets and the underlying company listings.
Chinese retail dominance of 90 percent in 2000 has fallen below 60 percent today and longer term more structured investors from outside China now hold nearly 25 percent of the market. With the varieties of Chinese listings also causing confusion, it is reassuring to see Stock Connect volumes growing rapidly as markets deepen which is now leading to more investment research and coverage which will further promote transparency and international standards. While Asian clients seem well weighted in China for their investment portfolios, it is clear that many US and European investors are not, which may become a call to action as 65 percent of our audience polling suggested the fundamentals of EM are stronger than DM and 40 percent also thought Asia would provide the best returns in the next decade.
The rise of Asia should provide investors with many different types of investments which allow access to this new global structural growth story. Not only can one follow the arrival of the Asian millennials as they shape their economies for the future and drive the adoption of new technologies and services, as well as traditional areas like housing, and also sustain the rising importance of R&D and technology which is fast becoming world-class and looking to offer similar solutions to big data and AI, as in the US.
With improving ESG and accounting standards and with explicit government policy support, global investors may feel increasingly comfortable in allocating to Asia where index and ETF exposures are low and where a rigorous and active approach to ESG and company engagement may pay off handsomely in the longer term. With less debt and better longer term fundamentals, Asia looks to be part of the new core equity class for strategic investors with solid earnings and dividend growth too.
Hunt for income
Given the current vagaries of the global political scene, Asia offers attractive income opportunities which further diversify portfolios away from the concentrated bets on US high yield and the US Fed policy, whilst adding additional returns. Due to the growing markets and rising domestic penetration of local investors, Asia will become less the tiger’s tail to be whipsawed by the US investor and more driven by sound economic policy, strong fundamentals and exciting investment opportunities to find income from equities and bonds.
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