Photo: Bloomberg
The pandemic has hurt businesses and economies. From an earlier phase of tentative recovery, many countries are now seeing a resurgence in the number of infections. As vaccination increases, the worst shall be put behind and the pandemic will become endemic.
Amid these massive public health challenges, there are some underlying trends already present before the pandemic which will continue to present potential opportunities for investors.
“We remain convinced by the consumption story for Asia. We believe that when Asian consumers get wealthier, they will continue to improve their lifestyles and aspire to spend more on better products,” says Martin Lau, managing partner at FSSA Investment Managers (FSSA IM), an autonomous team within First Sentier Investors which manages US$37.2 billion ($49.2 billion) as at March 31.
He says this consumption story will be especially pronounced in China, where there is both a huge market and growing mass affluence. Between 2016 and 2019, China’s per capita GDP increased by around a quarter to US$10,262. And there is, of course, the country’s 1.3 billion population.
Out of the sprawling consumer sector, Lau’s suggestion is to focus on cosmetic companies. He notes that last year, sales of lipsticks in China fell by almost 50% as lockdown measures were implemented in China and most of the world. “Most people did not feel the need to wear makeup as they were working from home. However, we believe that cosmetics will be a very profitable business beyond the pandemic in the long term,” says Lau.
Profitable businesses
Specific names cited by Lau include South Korea’s Amorepacific Corporation, LG Household & Health Care as well as Japan’s Shiseido Company. He calls these companies “very profitable businesses” and the market might have overlooked them. Year to date, Amorepacific has gained around 40% year to date, LG Household & Health Care is down around 5%, whereas Shiseido is up around 11%. Besides consumption plays, Lau likes the manufacturing and healthcare sectors as well. He calls them “long-term investment themes”.
Asia, over the years, has groomed numerous market-leading manufacturers in their respective fields. Take Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest foundry player, for example. Without the huge plants of this company, millions of chips would not be made, which means that countless electronic devices could not run.
In addition, there is also Samsung Electronics — the pride of South Korea — which commands leading market shares in various product categories such as mobile phones and semiconductors. TSMC — quoted on the New York Stock Exchange — has a market value of around US$568 billion while Samsung Electronics, trading in its home market, has a market cap of around US$490 billion. Lau expects companies like these, with the momentum and heft to constantly invest in their R&D efforts, to continue to move up the value-added curve.
Lau and his colleagues at FSSA are also firm believers in the long-term growth trend of the healthcare market in Asia, with companies investing increasing amounts in R&D and innovation, especially companies in China and Australia. “These trends support our bottom-up stock selection and remain among our key long-term investment themes,” he says.
With banks very much the core of any given economy, he also believes that the banking industry is poised to benefit from the recovery from the pandemic.
Short-term noise
“It is worth highlighting that until recently, the market believed that banks have a rather gloomy future, with low interest rates and pandemic-related uncertainties,” says Lau. “We view this as short-term noise.” He urges investors to take a longer term view, and pay closer attention to the growth potential of banks in markets with low credit penetration such as India and Indonesia, and with “reasonable or good profitability should benefit greatly when the economy ultimately recovers.”
In any case, Lau is upbeat about the prospects for investors. He says that the world has been through a recession due to the pandemic and strict lockdown measures imposed by governments, yet all asset classes including equities have had a good year in terms of returns driven by the monetary easing and fiscal stimulus rolled out by central banks last year. “We now expect the world to enter a recovery phase, starting from the low base of last year,” he adds.
Nevertheless, there are some risks investors need to watch out for — one of which is the belief that economic recovery and very low interest rates can coexist at the same time. “There will be increasing uncertainty around interest rates as the market will start to question the sustainability of such historically low rates,” says Lau.
With such macro economic conditions as the backdrop, investors ought to build a “reasonably balanced” portfolio, with exposure to both long-term investment trends and some of the recovery trends.
