Uncovering the future winners in Asia

Transformational trends converging in Asia could possibly unleash the next wave of growth opportunities in the region, with potential future winners being the industries that are set to benefit from urbanisation, technology and environmental, social and governance (ESG) related themes.

Over half of the world’s population is now living in Asia Pacific^[1],  while the region is projected to have the largest urban population on the planet by 2050^[2]. In the world’s second largest economy, 1.2 billion Chinese will join the middle class by 2027, representing a quarter of the total middle-class population globally^[3].

Under this urbanisation trend, the demand for housing, education, healthcare, food and other essential services will be boosted significantly in the years to come. The region is also forecast to generate half of global GDP and 40% of global consumption in about 20 years^[4], deepening intra-regional trade and enhancing Asian brands.

“Opportunities are where people are. If we take a compass and draw a large circle on the map with Indonesia at the centre, and China and India also within it, we will find that there are more people living inside than outside the circle,” said Caroline Loke, portfolio manager for Asia ex Japan Equity at PineBridge Investments.

That said, the opportunities after the pandemic are going to be markedly different from those seen in the manufacturing-led waves of growth in the past.

The region’s demographics, constituting the world’s largest population of ‘digital natives’^[5],  are primed for the next generation of technological innovations incubating in Asia. The region’s growing tech muscle can also be seen in areas such as automation, robotics, artificial intelligence, big data, and 5G.

Last year, for example, Hong Kong IPOs raised the largest amount since 2010 with over 60% of the funds raised by 'new economy' companies such as biotech enterprises^[6].

The drive for self-sufficiency in tech has given rise to domestic industries that aim to rival global peers. It’s worth noting that China is now the world’s largest market for industrial robots while automation technologies are gaining ground^[7]. India is also accelerating its digitalisation efforts and boasts world-leading companies in information technology services.

^{Source : International Federation of Robotics (IFR), as of December 2020. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any views represent the opinion of the investment manager, are valid as of the date of this document, and are subject to change.}

At the same time, ESG issues have increasingly moved to the top of corporate and governmental agendas, with China and South Korea leading the way in net zero carbon emissions goals and India shifting towards green energy.

Regulatory measures to encourage a greener energy mix are set to usher in changes in business models, potentially giving rise to new global industry leaders. For instance, China is now the largest market in the electric vehicle segment. With other leading electric vehicle makers in Asia, the industry is now a globally competitive one, Loke said.

ASIA EQUITIES

Investors are encouraged to capture these multi-year opportunities in the Asian equity and fixed income markets, which are still largely underrepresented in global indexes despite efforts to increase the weightings of the region’s growing economies in recent years.

Asia equities, which are characterised by diverse sectors and a growing number of listed companies, offer a rich ground for potential alpha opportunities. A benchmark-agnostic approach can help investors achieve better returns, said Loke.

This approach can help to ensure broad-based and stable sources of potential alpha under different market cycles, when opportunities will likely come from a wide range of sectors, company sizes and types.

“Free from the constraints of index weightings, this approach offers the flexibility to adjust capital allocations amid changing company, industry or macro dynamics, making it a potentially better fit for Asia’s constantly evolving markets,” Loke said.

Moreover, as volatilities and disruptions in the market will likely continue after Covid-19, active investing is also more relevant than ever in identifying future winners and mitigating risks, she said.

Elizabeth Soon, head of Asia ex Japan equities and India equity portfolio manager at PineBridge, added that staying above market noise and focusing on company fundamentals are essential to successful investing.

“Investors should carefully select companies that can deliver opportunities in the shifting landscape and navigate their ways through the transformation," said Soon.

On-the-ground research, including company visits and management meetings, is key to assessing the risks and returns of each potential investment and responding timely to market shifts, she said.

ASIA FIXED INCOME

In the credit markets, differentiation has become ever more important amid the dispersion of returns.

“Asia is going through an uneven recovery from Covid-19. Societies and industries are going through structural transformations, which suggest significant return dispersions across the credit spectrum going forward,” said Arthur Lau, head of Asia ex Japan fixed income.

So while Asian bonds offer attractive yields to global investors, investors would miss the nuances at the issuer level if they only consider yield alone.

“Asia investment grade (IG), for example, is a diverse market in terms of issuer types from sovereigns, supranationals to corporates. Selectivity and flexibility in managing the Asian bond exposures across duration, ratings, and yield will be key to portfolio returns,” Lau said.

Markets and sectors with a dynamic underlying environment lend themselves well to active investing. Stand-alone, high-conviction portfolios offer an alternative to help investors maximise returns as the region realises its full potential in the post-Covid era, he added.

Across IG and high yield, the PineBridge team leverages local-based research resources and global sectoral reach to examine credit from both the top-down and bottom-up.

“This deep sector knowledge is combined with on-the-ground insights to help us create a complete credit picture of the potential returns and risks. Unlike simply tracking the index, we also have the agility to reposition our portfolio according to market conditions,” said Lau.

To learn more about the mega trends in Asia that are going to reshape the world’s economy, and PineBridge’s Asia equity, fixed income and multi-asset strategies, please visit the website here.

^{All investments involve risk, including the loss of principal amount invested. Past performance is not indicative of future results. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. Any views express represent the opinion of the manager and are subject to change. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk. We are not soliciting or recommending any action based on this material. In Hong Kong, this document is issued by PineBridge Investments Asia Limited, a company incorporated in Bermuda with limited liability. This document has not been reviewed by the Securities and Futures Commission (SFC). Investors should note that the website pinebridge.com and any other websites (including any contents therein) referred to in this document has not been reviewed by the SFC. In Singapore, this document is issued by PineBridge Investments Singapore Limited (Company Reg. No. 199602054E), licensed and regulated by the Monetary Authority of Singapore (MAS). This advertisement or publication has not been reviewed by the MAS. Investors should note that the website pinebridge.com and any other websites (including any contents therein) referred to in this document have not been reviewed or endorsed by the MAS.}