This year is set to present a number of challenges for Asian equity investors, with political developments in Europe and China evolving, and potentially greater anti-globalisation momentum (from the US in particular) creating volatility in financial markets.
Nevertheless, we remain positive about the outlook for the region. Here, I’d like to examine three of the key issues facing Asian equity investors today and explain how we aim to position our Asian Income strategy to try to exploit the opportunities the region offers, while seeking to avoid the bumps in the road.
- Anti-trade sentiment
Since the election of Donald Trump as US president, investors have been very upbeat about the prospects for US economic growth. Historically, Asia has benefited from a strong US economy, with exports as the traditional driver. However, Trump’s anti-globalisation policies, which pledge to put ‘America first’, could present some challenges for Asian export economies. This is expected by investors, so, if Trump’s promises do not come to anything meaningful, we think Asian equities are likely to benefit.
Although currently dependent on exports, Asia as a whole has already begun its transition to an economy which is increasingly led by domestic services and consumption. This should provide some protection if Trump’s policy pledges come to fruition. The more developed parts of the Asia-Pacific region in particular, which our Asian Income strategy favours, have made good progress in this respect.
- Slowdown in China
Asian equity markets have started 2017 on a positive note, with stronger economic data coming out of China in particular. Last year, China was able to prop up its economy through infrastructure spending and a property market recovery. This year, it is hard to see a continuation of property price growth of that magnitude, and the economy is still structurally slowing as it rebalances to be more consumption-driven.
In line with Asia as a whole, China has seen a rotation into cyclicals such as commodities and banks, despite worse than expected earnings results in the latter. This is not a rotation which we believe is worth chasing; investors appear to have temporarily forgotten about the risk of China experiencing a financial shock on the back of the rampant build-up of credit since the financial crisis. In addition, we do not believe Chinese banks exist to create real economic value accretion to shareholders.
Instead, we see this rotation as an ideal opportunity to seek out companies generating quality earnings growth which have been shunned in favour of the so-called ‘reflation’ trade. We are finding such businesses in the travel, consumer, utilities and technology sectors. Added to this, we also have select exposure to infrastructure companies, such as toll-road operators and airport managers, which we believe enable the strategy to tap into the underlying growth rate of Asian economies.
- March of technology
While critics such as President Trump frequently accuse Asian workers of stealing jobs from the manufacturing heartland of the US, it is not that simple, and we see far more structural and long-term trends at play. One major factor is technological evolution, which has suited Asia very well. In general, Asian economies have been able to use technology and innovation to their advantage, especially with demographics in countries such as China worsening.
As such, we favour companies which use technology to their advantage and are ahead of the curve in terms of future consumption patterns and consumer experiences.