Article
While Asia dominates economically, investors remain largely underallocated. This gap can be expected to close over the coming years and decades through fundamentals that support this region. Asia is one of the best regions for active stock pickers.
July 21, 2022
Some of the best opportunities for investing in companies with capital appreciation and growing dividends are likely to be found in Asia over the next decade or two. The beauty of it: Investors do not need to make the traditional trade-off of growth for income. They can own some of the best structural growth stocks that are also growing their dividend payouts.
Asia is on track to account for more than 50% of global GDP at some point in the next 15–20 years.1 One of every two US dollars of global consumption is likely to be spent in Asia.2
Beyond Asia’s soaring consumption and the rise of its middle class, the region’s extension of infrastructure, the surging urbanization, industrialization, and expenditure on R&D has meant its corporate sector is innovating faster than ever. We are seeing rapid strides in human development, health care, and life expectancy, as well as higher literacy levels.
Fueled by the rise of the Asian middle class and their increasing purchasing power, consumer spending is a long-term growth driver for the region. China’s middle class is expected to reach over 1.2 billion people by 2030, while India’s is expected to double from 400 million in 2021 to 800 million by 2030.3 Asian consumers are expected to account for half of global consumption growth in the next decade, equivalent to a USD 10 trillion opportunity. This has significant revenue implications for the ecommerce, financial services, automotive, consumer durables, travel and leisure, education, and health care industries as consumers look to upgrade their lifestyles.4
As a result of population and economic growth, Asia is reaching the limits of its infrastructure capacity. According to the Asian Development Bank, emerging Asia will need to spend USD 1.7 trillion per year in infrastructure until 2030 to maintain its growth momentum, tackle poverty, and respond to climate change. The USD 1.7 trillion annual estimate is more than double the USD 750 billion Asian Development Bank (ADB) estimated in 2009.5 The inclusion of climate-related investments is also a major contributing factor. Companies within the energy, materials, and industrials sectors are expected to be large beneficiaries.
A common question and perhaps one that is most misunderstood is how this explosive and transformative growth can be captured in a portfolio? Investors often like to know if their portfolios need to focus on a particular sector, country, style, or be diversified across a range of thematic opportunities. It is tempting for them to seek out the highest “growth” companies in order to benefit from the structural growth trends in the region.
However, evidence over the last 20 years suggests that, actually, the highest growth stocks have underperformed, while it is the middle ground, perhaps best thought of as “sustainable” growth, that have generated the highest investment returns. Note from the chart below that not only have this middle tier generated the highest capital gains, but they have also paid attractive dividend yields.
As is well known, Asia is extremely diverse, with differences in governance methods, economic systems, demographics, wealth, and growth trajectories. Asia is also much more than just an early-stage growth story, which is not always appreciated by investors. There are also many high-quality companies that can be found in this region.
Often, these groups adhere to the same level of corporate governance and compliance as their developed market rivals. Many of these companies have dual listings in developed markets, which require them to follow more rigorous regulations. Meanwhile, their international investor base, which may include large institutional investors, means that it is in their interest to adhere to the highest levels of corporate governance.
The key difference, however, is that these markets are a lot less efficient informationally. This can create excellent opportunities for active investors that actively exploit these pricing inefficiencies.
There is no question that Asia is successfully transforming itself from a purely low-cost production center or “made in Asia” to “born in Asia,” one driven by innovation and Asia’s highly adaptable digital consumers. Over the past decade, the region has developed and deepened its technological capabilities rapidly, accounting for a large share of global growth in technology company revenue start-up funding, spending on R&D, and patents filed. Most of Asia’s technological edge has centered around China, Japan, Taiwan, and South Korea, with China alone accounting for 45% of the world’s patents filed.6 However, India is also making good progress particularly as R&D centers expand beyond the public sector to those led by multinationals.
Renewable energy is expected to account for an estimated 40% of average annual global energy investments through 2025 and Asia is a leading player. Its share of installed renewable capacity is 45%, compared with 25% in Europe and 16% for North America. At the same time, the International Energy Agency expects Asia to account for 64% of new renewable energy additions to 2040.7 The clean energy industry is expected to be a major growth sector for Asia in the coming years.
The region is probably one of the best areas of opportunity for active stock pickers in the world. Firstly, this is due to the sheer size of Asia’s equity market, which makes it an attractive market to hunt for stocks. Secondly, as mentioned, these markets are not as efficient as those in the developed world, which creates additional opportunities.
To really take advantage of these opportunities, however, you need to be an active investor. You also need to have access to the right resources. Often the best opportunities can only be found by having boots on the ground – analysts that are native to the region and have experience investing in that local market.
For instance, when you look at a country like South Korea, on a price-multiple basis it often looks cheap. However, there is a reason why South Korean stocks trade at a discount. This is a highly traditional market. Often there is a conglomerate discount priced into stock valuations due to companies having many crossover owners.
By contrast, if you look at India, stocks in this market look quite expensive. Often you will see stocks trading at more than 50 times price-to-earnings. However, this makes sense when you consider that these companies have earnings growth in the region of 20–30%.8 They actually provide a very good proxy for tapping into India’s economic growth potential.
Asia offers some of the best dividend-paying stocks that are also exposed to some of the best structural growth opportunities in the region.
Compared with their US peers, Asian corporates spend almost twice as much of their cash on capital expenditures.
Asia Pacific’s vast population, economies, and communities are extremely vulnerable to climate change, making it a significant sustainability risk factor for the region. It impacts the region in many different ways. For example, in many parts of South Asia the most pressing issue is heat waves and chronic heat resulting in extreme weather conditions.9
China is the world’s most important manufacturing base, which is reflected in its correspondingly high CO2 emissions. The country is also a signatory of the Paris Climate Agreement and it has set itself an ambitious goal of reaching net zero by 2060.10 Furthermore, it has one of the world’s largest electric car markets, with its own domestic electric vehicle companies, such as BYD and NIO. The country also has extremely ambitious plans to build renewable infrastructure and electrify its huge road network in the coming decades.11
In fact, a huge amount of green growth opportunities can also be found in Asia. Asia could have the greatest abundance of ESG investment opportunities anywhere in the world.
To what extent and for how long will inflation rise? The uncertainty surrounding the effects of inflation has increased massively. The current situation is calling for existing investment strategies to be reviewed and new opportunities to be evaluated.
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1 Business Standard (2019, July 15). Asia on track to top 50% of world GDP by 2040, says McKinsey report. www.Business-Standard.Com. https://www.business-standard.com/article/international/asia-on-track-to-top-50-of-world-gdp-by-2040-says-mckinsey-report-119071500858_1.html.
2 World Economic Forum (2021, October 22). What percentage of the world’s consumer class live in Asia? https://www.weforum.org/agenda/2021/10/growth-consumers-asia-indonesia-bangladesh-pakistan-philippines.
3 World Data Lab (2021, April 16). China vs. India — Where is the momentum in consumer spending? https://worlddata.io/blog/china-vs-india-where-is-the-momentum-in-consumer-spending.
4 World Economic Forum (2020, July 13). The rise of Asia’s middle class. https://www.weforum.org/agenda/2020/07/the-rise-of-the-asian-middle-class.
5 Asia Development Bank (2019, May 1). Asian Development Bank: Meeting Asia’s Infrastructure Needs. Asia House. https://asiahouse.org/event/asian-development-bank-meeting-asias-infrastructure-needs/.
6 Woetzel, J., & Seong, J. (2021, January 5). What is driving Asia’s technological rise? McKinsey & Company. https://www.mckinsey.com/mgi/overview/in-the-news/what-is-driving-asias-technological-rise.
7 IEA (2021, December 31). Renewables – Global Energy Review 2021 – Analysis. https://www.iea.org/reports/global-energy-review-2021/renewables.
8 Tan, W. (2021, January 7). Earnings growth in Asia could jump by more than 20% this year, say UBS and Goldman Sachs. CNBC. https://www.cnbc.com/2021/01/07/asia-earnings-growth-could-jump-over-20percent-in-2021-ubs-and-goldman-sachs-.html.
9 VOA Learning English (2022, May 27). Report: South Asia’s Heat Waves 30 Times Likelier with Climate Change. VOA. https://learningenglish.voanews.com/a/report-south-asia-s-heat-waves-30-times-likelier-with-climate-change/6590454.html.
10 Bloomberg News (2021, August 10). How China Plans to Become Carbon-Neutral by 2060. Bloomberg. https://www.bloomberg.com/news/articles/2021-08-10/how-china-plans-to-become carbon-neutral-by-2060-quicktake.
11 World Economic Forum (2022, May 20). Which countries have the largest electric vehicle markets? https://www.weforum.org/agenda/2021/02/electric-vehicle-market-global/.
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