The world may see a “significant” shift in resource and capital allocation, according to Siddhartha Singh, investment director, Asia equities in Hong Kong for PineBridge Investments.
In his report on the 2021 midyear Asia equities outlook published June 28, Singh believes that the ongoing Covid-19 pandemic will recede sooner than later, although its impact will be felt for years to come.
As such, he expects more initiatives pitched across Asia in areas such as smart infrastructure including healthcare infrastructure, increased investments in digitalisation and automation, as well as a greater focus on environmental imperatives.
All of these, Singh says, could have a meaningful impact on Asia’s equity markets.
Equity markets in Asia have remained resilient during the Covid-19 pandemic, with the exception of the deep sell-off in the 1Q2020, which has since been recouped.
Citing lessons from past crises including the two World Wars and the Spanish flu pandemic in 1918, Singh says economies generally “build back stronger” and there are “few reasons” why the outcome should be different today.
On the resiliency of the business environment in Asia, Singh has identified two notable drivers. These are, the pent-up demand for goods and a digitisation-led impulse.
The former has boosted manufacturing activity from low levels of inventories while the latter has led to an increase in digital penetration as firms adjusted to changing customer behaviour.
“Both digital leaders and laggards are stepping up investments: The former want to extend their lead, while the latter want to catch up,” writes Singh.
He adds that real investment in information processing equipment has “generally been robust” throughout the pandemic.
Furthermore, new IT investments in digital areas are expected to increase, which is a tailwind for some of the IT companies in the region.
To be sure, Gartner, a global research and advisory company, says it sees IT spending growth rising an average of 300 basis points in 2021 to 2023 from pre-Covid-19 levels.
In the near-term, as growth forecasts in Asia increase, there have been concerns about long-dormant inflation returning.
As it is, everything from food to commodities is currently soaring and there are shortages of inputs ranging from chips to bicycle components.
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“There’s also a fear that too much stimulus will distort the supply and demand dynamics when some economies are looking to come back on track,” says Singh.
However, on the ground, there remains a “slack in services purchasing managers’ indices (PMIs), stress in small and micro enterprises and unemployment levels above long-term averages”, all of which, Singh believes indicate that growth has yet to take hold.
On this, the fear of inflation and ensuing policy tightening in Asia is “premature”, he says.
Transformation in Asian companies
Beyond the regulatory changes brought about by Covid-19, Asian companies will see transformation due to geopolitics and sector-level disruptions.
For instance, in the Asian tech sector, US sanctions and greater scrutiny over anti-trust practices at home have disrupted China’s tech sector, says Singh.
“This has led to a sell-off in some names despite strong first-quarter results and decent forward guidance, on the back of prevailing demand indicators and shortages of semiconductors and other key components (for instance, a leading Japanese original equipment manufacturer recently announced it was halting part of its operations due to component shortages),” he writes.
That said, Singh expects earnings in the tech sector to remain on its growth trajectory despite the sell-off.
“Technology companies had been seen as the best shot to capture Asia’s growth cost-effectively. Their operating leverage made them attractive. Asset-light business models and, often, the lack of physical goods reduce the capital required to a bare minimum,” he says.
“Therefore, tech companies could justify extra-high multiples despite minimal capital and no incremental cost to serve a global addressable market. Add to this the many unfolding tech-led disruptions that create opportunities in the sector: artificial intelligence, Internet of things (IoT), blockchain, edge computing, cloud tech, 5G, cybersecurity, data centres, automotive tech demand, and fintech, to name just a few.”
“Thus, we believe investors should concern themselves not with the sell-off itself, but with the right selection of companies that can harness these long-term trends,” he adds.
Environmental goals
Environmental imperatives are now at the top of the agenda for governments and investors, says Singh.
“We believe this will be among the strongest forces that could drive growth and investment opportunities in Asia,” he writes.
For instance, China, which accounted for 27% of the world’s emissions in 2019, has pledged to reach net-zero carbon emissions by 2060.
China was the top contributor in 2019 followed by the US’s 11%.
The goal, notes Singh, is likely to change the way companies operate in China, much like the reorganisation of the steel industry.
South Korea and Japan are also leading in the initiative in Asia.
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In Southeast Asia, Vietnam is drafting a new power development plan, while the Philippines is implementing renewable portfolio standards and a green energy auction.
Indonesia has also introduced a renewable energy law that “could lead to bold changes”.
“As some of the world’s biggest companies and deepest-pocketed investors line up trillions of dollars to finance a shift away from fossil fuels, opportunities to participate in newer areas such as renewable food chains, storage, grids, fuel cells, eco-friendly mobility, and so forth abound,” says Singh.
“Once again, we believe being on the side of disruption with the right selection of companies will be the key to future success,” he adds.
Amid the pandemic and changes in trends, Singh sees Asia to remain as a fast-growing region and one that will be “well anchored into the future”.
“We believe the longer the present state of lowered and reconfigured economic activity continues, the stronger the trends toward automation, digitisation, environment, and healthcare imperatives will grow, creating numerous investment opportunities over time.”
“The only requirement in this environment is a robust, time-tested investment philosophy that seeks to uncover quality rather than just ride the trends,” he says.
Photo: Bloomberg
