Uncertainty has been the dominant theme of 2020 as the world struggles to live with a virus that came out of nowhere, wreaking havoc on economies, societies and individuals.
Those of us looking for a clean break in the year ahead may be disappointed because this uncertainty will spill over into 2021.
For example, Covid-19 will be around for many months to come; dark clouds will continue to cast a shadow over global growth. The US presidential election has delivered a winner – Joe Biden. But President Donald Trump has, without evidence, challenged the legitimacy of the count. Trump’s refusal to concede threatens the smooth transfer of power.
Despite this uncertainty, we have identified four big themes that investors should watch because they represent both opportunities and risks:
China and self-reliance
China’s desire for self-reliance is growing because of the external challenges it faced in 2020. The country’s vulnerabilities were exposed via supply insecurity during the initial stages of the pandemic; a trade war with the US; and the disruption from Huawei’s inability to access the global semiconductor supply chain, which is largely dependent on US technologies.
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.
China’s shift towards domestic consumption and services started a few years ago. But domestic consumption’s importance to the economy was highlighted this year as external demand became less dependable following the global pandemic.
Retail sales, one measure of domestic consumption, are not yet back to pre-pandemic levels despite its rebound following a steep drop. As in other parts of the world, online sales increased and continue to fly high, even as China emerges from the worst of the pandemic.
One of China’s goals is to be less dependent on fossil fuels. While it is an oil producer, it is also the world’s largest oil importer. This leaves the country vulnerable to supply disruptions from overseas. That’s why China has been at the forefront of investment and research into sustainable energy and other forms of green technology.
We have seen much soul searching over growing environmental concerns in many countries around the world. This could lead to concrete policies that will set economies along more sustainable development paths.
For example, China’s President Xi Jinping announced in September that the country would aim to be carbon neutral by 2060 – a goal that may require some US$15 trillion in investment1. A new administration in the US next year could lead to a US$2 trillion package of environmentally-friendly investments2.
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.
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) 3. China reduces energy risk by having the renewables supply chain within its own borders.
Going green for China will mean decarbonisation, with the decline in fossil fuel usage coming mainly from transport and power. It has made big bets on electric vehicles (its solution for transport) and renewable energy (its solution for power). The country is globally competitive and self-reliant in both these industries.
The pandemic is still driving markets around the world and will continue to do so next year. At the time of writing, a new wave of Covid-19 cases in developed economies was injecting volatility back into equity markets. In some cases – such as in England, France and Spain – governments have responded with new national lockdowns or curfews.
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 Index4 – look set to suffer less damage than many other economies because of their effective responses to the pandemic.
Many Asian economies battled the initial stages of Covid-19 with some success, and lockdown restrictions are being eased in many of these countries. However, we do see economic risks to countries such as India and Indonesia.
We need to remain vigilant for a resurgence of cases in places that seem to be controlling the spread of the pandemic. There will be no permanent solution for this virus, and the economic chaos that it causes, until a safe vaccine is developed and distributed.
Asian policymakers have done a lot to boost their economies, employing both monetary and fiscal policy tools. Having said that, they have done so in moderation. For example, central banks have been measured with interest rate cuts, leaving room for further reductions should they be required.
Asian central banks have also been buying bonds as part of unconventional stimulus policies that are often referred to as quantitative easing (QE). QE programmes were a major feature of the global financial crisis a decade ago. There is scope for further expansion of this type of stimulus.
Investors need to remember that countries within the region tend to be much better financed and governed than during earlier crises. Most Asian countries now have stronger current accounts and healthier government debt-to-GDP numbers. Bank and corporate balance sheets are also more robust.
Looking outside of Asia, the unprecedented speed and magnitude of co-ordinated government support helped to mitigate the economic impact of lockdowns, and threw a vital lifeline to people whose livelihoods are under threat. However, this level of support is unsustainable and there is a risk that economies and markets will suffer when these policies are eventually withdrawn.
Restrictions to freedom of movement and business activity have battered the earnings of Asian companies this year. While we hope there is an earnings growth revival in 2021, this would depend on whether the world manages to beat the virus.
The region is still one of the fastest-growing, with structural growth trends that will continue to play out for years to come.
However, Asia remains home to many good-quality companies, with clear earnings drivers, robust balance sheets and healthy cash levels. The region is still one of the fastest-growing, with structural growth trends that will continue to play out for years to come.
Investors mustn’t lose sight of the six investment themes that make Asia special:
- Aspiration - Rising affluence is leading to fast growth in premium consumption such as education, financial services and higher-quality food and beverage.
- Digital future - Widespread adoption of technology means a bright future for gaming, the internet, fintech and tech services, such as the cloud.
- Building Asia - Urbanisation and an infrastructure boom is set to benefit property developers and materials producers, such as the cement industry.
- Tech enablers - Regional tech supply chains are well-positioned for structural growth related to the rollout of 5G mobile networks, big data and digital interconnectivity.
- Health and wellness - Asia is home to a diverse range of companies leading advancements in biotech and medical device technology. These firms are active in contract research, respiratory and sleep care, vaccinations, pharmaceuticals and diagnostic products.
- Going green - Asian companies are in the driver’s seat of this mega-trend. ‘Grid parity’ will ensure strong demand for renewables and batteries for decades to come. Environmental protection and waste management also have bright futures.
1 Aberdeen Standard Investments Research Institute, APAC Matters: red to green, R. Gilhooly, S. Kochugovindan & Y. Dunga, October 5 2020
2 BBC website, Biden sets out $2tn plan for carbon-free electricity by 2035, July 14 2020
3 Sanford C. Bernstein, Bernstein Hydrogen: Making money in fuel cells - lessons from solar, wind and batteries, October 2020
4 Bloomberg, MSCI, November 17 2020