Stock selection will be increasingly important in Asia in 2020, writes Asian Equities manager Matthew Dobbs, with China offering the most exciting opportunities.
Asian equity markets yielded solid positive returns in 2019, led by China and Taiwan, and aided by a return of confidence to the information technology sector. Looser liquidity conditions and, towards year end, rising optimism over the global economy added to a more positive tone. Politics remains the key area of uncertainty, including the unrest in Hong Kong and the increased geo-political rivalry between China and the US, of which the trade disputes are merely the most obvious symptom.
The recovery in markets in a year where there was precious little earnings growth in aggregate means regional valuations are back to slightly above their 10-year averages. Consensus earnings growth of around 10% looks achievable but sensitive to hopes for the information technology sector being fulfilled on the back of demand for 5G handsets, infrastructure and recovery in server demand, and the distinctly small green shoots of global growth proving sustainable.
We would prefer to err on the more conservative side. The known unknowns are political, and a number of long-held assumptions underpinning our Asian investments such as the merits of free trade or the rule of law and stability of Hong Kong SAR are being seriously challenged. The other issue surrounds China, an increasingly important end market, but also rival, to the whole of Asia. The economy is likely to continue to expand at a gently decelerating pace. This may, on the face of it, seem bad news for regional earnings growth. But we see this as a conscious, multi-year shift by the Beijing authorities away from a credit-intensive, investment-heavy growth model that enhances the long-term sustainability of the economy and reduces its vulnerability to capital flight and debt-led deflation.
Despite the generally lower growth in Asia that is in prospect over the next decade, as stockpickers we remain optimistic. Lower overall growth is less important to active investors than shifts in the contribution to growth. We continue to focus on finding companies and management capable of exploiting these faster growth pockets in areas such as e-commerce, digital media, IT hardware, consumer leisure, long-term savings demand, increased healthcare demand and spending, lifestyle changes, and consumer ‘upgrading’.
This is allied to some solid financial metrics in the region, including generally strong national balance sheets, current account surpluses and a corporate sector with among the lowest financial leverage in the world. The more shareholder-focused management we favour has been disciplined in capital management and expansion spending, with the result being ample cashflow underpinning dividends that remain at attractive levels globally.
Perhaps the last word should go to the rising profile being given to environmental, social and governance (ESG) factors. These have always been important considerations for us as Asian investors – there have been many Asian companies (in some cases, the biggest in their market by capitalisation) that we have avoided investing in, owing to our doubts over the sustainability of their business models and/or doubts over governance and shareholder focus. What has changed is that the consideration of these issues has become a more explicit part of the process. It is also an important aspect of our dialogue with companies that have continued focus on governance and stewardship, but also growing focus on how the region contributing most to global growth can ease the inevitable impact on the environment. Asia’s innate creativity and growing strength in research and development can be as much part of the solution as the problem.
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