As we begin a new year, those of us looking for a clean break from last year’s uncertainty may be disappointed: 2020’s challenges have not disappeared overnight and look likely to linger for some time.
For example, Covid-19 will be around for many months to come; its dark clouds will continue to cast a shadow over global growth. The US presidential election has delivered a winner, but Joe Biden’s ability to push through his progressive agenda will be determined by a Congress in which Democrats only have razor thin control of the Senate..
Despite this uncertainty, with Asia Dragon Trust we have identified four big themes that investors should watch because they represent both opportunities and risks.
China and self-reliance
China’s desire for self-reliance is growing because of the external challenges it faced in 2020. The country’s vulnerabilities were exposed via supply insecurity during the initial stages of the pandemic; a trade war with the US; and the disruption from Huawei’s inability to access the global semiconductor supply chain, which is largely dependent on US technologies.
There are three areas of focus in China’s push for self-reliance: boosting domestic consumption; localisation of new technology, especially the advanced semiconductor technology that underpins 5G mobile networks; and the transition towards green energy.
China’s shift towards domestic consumption and services started a few years ago. But domestic consumption’s importance to the economy was highlighted this year as external demand became less dependable following the global pandemic.
Retail sales, one measure of domestic consumption, are not yet back to pre-pandemic levels despite rebounding following a steep drop. As in other parts of the world, online sales increased and continue to fly high.
One of China’s goals is to be less dependent on fossil fuels. While it is an oil producer, it is also the world’s largest oil importer. This leaves the country vulnerable to supply disruptions from overseas. That is why China has been at the forefront of investment and research into sustainable energy and other forms of green technology.
We have seen much soul-searching over growing environmental concerns in many countries around the world. This could lead to concrete policies that will set economies along more sustainable development paths.
For example, China’s President Xi Jinping announced last September that the country would aim to be carbon-neutral by 2060 – a goal that may require some US$15trn in investment.
The change in US administration could lead to a US$2trn package of environmentally friendly investments. This presents long-term investment opportunities in the renewables supply chain that supports industries such as wind power, solar power and electric vehicles. Many of the companies within this renewables value chain are located in China.
For example, China’s wind turbine makers have some 26 per cent of the global market, its battery makers account for 78 per cent of the world’s battery manufacturing capacity, and the country is responsible for 91 per cent of silicon wafer production (used in harnessing solar energy). China reduces energy risk by having the renewables supply chain within its own borders.
Going green for China will mean decarbonisation, with the decline in fossil fuel usage coming mainly from transport and power. It has made big bets on electric vehicles (its transport solution) and renewable energy (its power solution). The country is globally competitive and self-reliant in both these industries.
The pandemic is still driving markets around the world and will continue to do so over the coming months. A new wave of Covid-19 cases in developed economies began injecting volatility back into equity markets towards the end of 2020. In some cases – such as in France and Spain – governments have responded with new national lockdowns or curfews.
The situation in Asia has been more encouraging. China, South Korea, Taiwan, Hong Kong, Australia and New Zealand – which together represent more than 85 per cent of the benchmark MSCI AC Asia Pacific ex Japan Index – look set to suffer less damage than many other economies because of their effective responses to the pandemic.
Many Asian economies battled the initial stages of Covid-19 with some success, and lockdown restrictions have been eased in many of these countries. However, we do see economic risks to countries such as India and Indonesia.
We need to remain vigilant for a resurgence of cases in places that seem to be controlling the spread of the pandemic. There will be no permanent solution for this virus, and the economic chaos that it causes, until mass vaccination programmes have been rolled out.
Asian policymakers have done a lot to boost their economies, employing both monetary and fiscal policy tools. Having said that, they have done so in moderation. For example, central banks have been measured with interest rate cuts, leaving room for further reductions should they be required.
Asian central banks have also been buying bonds as part of unconventional stimulus policies that are often referred to as quantitative easing (QE). Such QE programmes were a major feature of 2008’s global financial crisis. There is scope for further expansion of this type of stimulus.
Investors need to remember that countries within the region now tend to be much better financed and governed than during earlier crises. Most Asian countries now have stronger current accounts and healthier government debt-to-gross domestic product (GDP) numbers. Bank and corporate balance sheets are also more robust.
Looking outside of Asia, the unprecedented speed and magnitude of coordinated government support helped to mitigate the economic impact of lockdowns, throwing a vital lifeline to people whose livelihoods are under threat. However, this level of support is unsustainable and there is a risk that economies and markets will suffer when these policies are eventually withdrawn.
Restrictions to freedom of movement and business activity battered the earnings of Asian companies last year. While we hope there is an earnings growth revival in 2021, this would depend on whether the world manages to beat the virus.
However, Asia remains home to many good-quality companies, with clear earnings drivers, robust balance sheets and healthy cash levels. The region is still one of the fastest-growing, with structural growth trends that will continue to play out for years to come.
Investors must not lose sight of the six investment themes that make Asia special:
• Aspiration – Rising affluence is leading to fast growth in premium consumption such as education, financial services and higher-quality food and beverages.
• Digital future – Widespread adoption of technology means a bright future for gaming, the internet, fintech and tech services, such as the cloud.
• Building Asia – Urbanisation and an infrastructure boom is set to benefit property developers and materials producers, such as the cement industry.
• Tech enablers – Regional tech supply chains are well-positioned for structural growth related to the roll-out of 5G mobile networks, big data and digital interconnectivity.
• Health and wellness – Asia is home to a diverse range of companies leading advancements in biotech and medical device technology. These firms are active in contract research, respiratory and sleep care, vaccinations, pharmaceuticals and diagnostic products.
• Going green – Asian companies are in the driver’s seat of this megatrend. “Grid parity” will ensure strong demand for renewables and batteries for decades to come. Environmental protection and waste management also have bright futures.
Risk factors you should consider prior to investing:
• The value of investments and the income from them can fall and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within five years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the net asset value (NAV), meaning that any movement in the value of the Company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions that represent more than normal trading volumes, which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital, which may erode the capital value of the investment.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying NAV.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices – the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets that tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends, and certain investors may be subject to further tax on dividends.
• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
Other important information:
Issued by Aberdeen Asset Managers Limited, which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments. Find out more at www.asiadragontrust.co.uk and register for updates here. Follow us on social media here: Twitter or LinkedIn.
Pruksa Iamthongthong is the investment manager at Asia Dragon Trust plc.