Investors should look to Asia for growth
As a worldwide investment house, we are commonly asked the same two questions wherever we go: what are clients looking for and, what opportunities do we see? Our answer to both is also the same: growth.
A slowing global economy, disruption driven by populist politics and the potential impact of a full-blown trade war are issues at the forefront of clients’ minds. Add in pitifully low interest rates even after a decade of monetary and fiscal intervention, and it underlines why enhanced yield with downside protection remains at the top of clients’ wish-lists.
What’s puzzling is that more investors aren’t searching for solutions in Asia. It is the world’s fastest growing region, after all. Within 30 years, China and India alone are forecast to account for more than half of global economic growth.
Structural trends – greater affluence, growing workforces and the advent of new technologies – look set to power Asian economies for years. As investors, we aim to look beyond short-term noise and focus on finding well-run businesses best placed to benefit from this long-term structural growth.
When we scoured the Asia universe a decade ago, we felt safer investing in companies listed in Hong Kong and Singapore, where strict standards of accounting and transparency afforded us clearer insights into firms’ earnings prospects.
But as governance standards have improved elsewhere, increasingly we have been targeting opportunities in emerging Asia. We have long been optimistic about India’s potential, while we have also been raising exposure selectively to stocks in China’s A-share market.
No longer do we need to use Hong Kong-listed stocks as a proxy to access China’s growth. Similarly, we have taken money out of Singapore – which used to act as the gateway to higher growth Southeast Asian economies – and raised direct positions in markets such as Indonesia.
What India and China have in common is huge populations and expanding middle classes. Rising wage levels will drive domestic consumption, making both markets more self-sufficient and less vulnerable to external factors such as trade wars or US rate hikes.
As a result, we tend to favour firms linked to domestic demand, such as those in food and beverage, health care, tourism and financial services. These provide exposure to structural growth themes that will continue to play out.
From a sector perspective we’re positive on the outlook for financial firms as proxies for regional economic growth. We also see materials companies – cement operators, for example – as being well-positioned to benefit from Asian infrastructure development. At the same time, steady income growth, increasing wealth and rising urbanisation should underpin demand for residential and commercial real estate.
Still, we are a fundamental stock-picker, not a thematic investor. Our portfolio allocations simply reflect where we have found firms we like. That said, we do take an industry’s outlook into consideration when we analyse a company’s growth prospects.
In summary, what clients want is exposure to growth potential with protection against downside risks. That’s what we aim to achieve in our Asian equity portfolios. We favour businesses with pricing power and strong cash flows that offer exposure to fast-growing emerging economies, where they have much scope to expand.
Behind this lies our long-held conviction that structural drivers – such as rising consumer spending and emerging technological trends – will continue to power the Asian growth story.
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The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.
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