article 3 months old

Asia Attractions As Bright As Ever

International | Nov 24 2021

By James Thom, Senior Investment Director, Asian Equities, abrdn

We see plenty of reasons for investors to be positive on the outlook for Asian equities in 2022 now that peak coronavirus appears to have passed and the region’s economies are reopening.

Progress in the rollout of vaccinations allied to improved anti-viral treatments point to a policy transition from zero-covid tolerance to one of endemic coronavirus management.

We anticipate further easing of mobility restrictions and a resumption in travel. We also expect Asian exports to pick up as demand grows in the US and Europe. This promises to drive consumption and corporate earnings.

A key question globally concerns how transitory inflation really is, and we don’t have a crystal ball. But unlike Western markets, we haven’t seen much price pressure in Asia so far.

Investors should feel reassured that Asian central banks have more headroom to adjust monetary settings, having been more conservative with state policy tools in recent years.

The Bank of Korea has signalled a potential rate hike soon, but Asian policymakers on the whole continue to prioritise economic support. Asian balance sheets are also in a healthy state, with most of our holdings either meeting or exceeding earnings expectations in recent results.

Economic reopening will help to mitigate inflationary pressures tied to near-term bottlenecks in supply chains. This remains an area we will continue to monitor closely. We urge investors to diversify across markets and sectors and focus on firms with pricing power that can pass on cost pressures to protect their margins. We see many quality businesses doing exactly that.

While Asia experienced an equity market rally in the first half of this year, a regulatory reset in China and the prospect of US tapering led to a correction. Still, corporate Asia is well placed to withstand a cycle of a stronger dollar overall.

We expect China’s property sector to remain under pressure, while China’s zero-covid policy approach is likely to stay in place until after it has hosted the winter Olympics at least. Regulatory intervention will likely be at the forefront of investor thinking in the run-up to the Party Congress in November, when President Xi Jinping is expected to secure a third term.

Again, investors can rest assured that Beijing has levers to pull in the event that economic conditions become less stable. Bear in mind, much of China’s growth slowdown is self-imposed via restrictions in property and energy sectors and the common prosperity push.

Investors need to be selective. But look carefully and they can find quality Chinese businesses on the right side of the policy agenda delivering strong growth. Structural drivers behind consumer spending in China remain intact. We predict rising disposable incomes and increasingly health-conscious citizens will drive demand for healthcare products and services.

Growth in domestic consumption remains a strategic priority for Chinese authorities, so we view quality consumer stocks as well placed to withstand regulatory headwinds.

We believe Southeast Asia will be the biggest beneficiary of economic reopening. Hit hard by covid, Indonesia and Vietnam are just emerging from the pandemic. They’re working through supply-chain indigestion, with cyclical stocks long overdue a meaningful rebound.

India’s stock market has been taking a breather of late, having rallied hard this year. But we’re confident there’s plenty of market upside to come given favourable demographics, low mortgage rates, rising household incomes and improving housing affordability.

After years of subdued economic growth, India looks primed for a rebound that should feed through to earnings. A brightening picture is boosting sentiment and company spending plans.

There’s also excitement around India’s tech sector. The nation has produced 100 unicorns and counting. Many are listing on exchange, transforming the corporate landscape. Our team has been wading through stacks of IPO information to cherry-pick likely winners.

Foreign direct investment continues to flow into the tech sector. As these businesses grow and harness new technologies, they will invest – creating jobs and lifting incomes.

Consumers will also benefit from better products and services.

India’s government, too, is reforming the business environment, attracting foreign investment, incentivising companies via tax benefits and raising spending on key infrastructure projects. We expect a broadening of India’s entire tech ecosystem, driving more growth in digitisation.

In terms of valuations, Asian stocks look reasonable relative to developed markets. The 12-month forward price-earnings ratio for MSCI AC Asia Pacific ex-Japan Index stands at 15.6x, versus 22.5x for S&P500, 16.2x for MSCI Europe and 20.3x for MSCI World.

Consensus earnings growth for Asia Pacific ex-Japan markets forecast to be in double digits for 2022.

We believe Asia’s burgeoning middle class will fuel rising demand for health-care services and wealth management, while the region’s urbanisation and infrastructure needs remain vast. At the same time, changes brought about by the pandemic could prove durable and reinforce existing trends – such as increased adoption of cloud computing and 5G networks.

Policymakers globally are also committing to a lower-carbon future and Asia is at the forefront of change. Investors can anticipate tailwinds for companies operating in renewable energy, batteries, electric vehicles, related infrastructure and environmental management.

As an investor we focus on quality firms with strong balance sheets and sustainable earnings prospects best-placed to capitalise on structural growth opportunities in the region. We see market corrections as an opportunity to add to our long-term quality holdings affordably.

In Asia, investors need to think long term. But Asia’s attractions remain as bright as ever.

Important Information

Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. We recommend that you seek financial advice prior to making an investment decision.

The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any investments or funds and does not constitute investment research, investment recommendation or investment advice in any jurisdiction.

Any research or analysis used to derive, or in relation to, the above information has been procured by us for our own use, without taking into account the investment objectives, financial situation or particular needs of any specific investor, and may have been acted on for own purpose.

No warranty is given as to the accuracy, adequacy or completeness of the information contained in this document and no liability for errors or omissions in such information. Investors must make assessments to the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations, as they may consider necessary or appropriate for the purpose of such assessments.

Any opinion or estimate contained in this document are made on a general basis. No information contained herein constitutes investment, tax, legal or any other advice, or an invitation to apply for securities in any jurisdiction where such an offer or invitation is unlawful, or in which the person making such an offer is not qualified to do so.

Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use by abrdn**. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, abrdn** or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.

**abrdn means the relevant member of abrdn group, being abrdn plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time.

Bloomberg data are for illustrative purposes only. No assumptions regarding future performance should be made.

This content is available in the following countries/regions and issued by the respective entities detailed below: Hong Kong: abrdn Hong Kong Limited. This document has not been reviewed by the Securities and Futures Commission.

Singapore: abrdn Asia Limited, Registration Number 199105448E.


Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms