Asia’s economic recovery: What are the investment themes to watch?
Asia is a diverse region which consists of developed and emerging markets, and contributes to over one-third of the world’s GDP1 that we simply cannot ignore.
In Schroders’ earlier economic forecast, we looked at what the reopening of the Asia Pacific and Chinese economies would imply for the world. In a recent article, we discussed the three factors that we see steering the Asia Pacific investment markets. But to uncover the best opportunities, selectivity in terms of market and sectors will be key.
Zooming in to the Asia investment universe, our analysis found that four areas are well placed to benefit from the Asian reopening and growth story. These opportunities, covering both the growth and income space, include:
- Asian consumption: Apart from the themes of China’s re-opening and self-reliant economy, import substitution, and common prosperity in play, we are also seeing a release in pent-up consumer demand, which is supported by strong labour markets and healthy household savings. Consumer spending is gradually shifting from goods to services. Meanwhile, the travel and leisure industries continue to recover, which should provide more legs for the consumer sector in Asia.
- Technology supply chain: Structural growth trends such as 5G and electric vehicles (EVs), as well as the brewing metaverse concept will likely continue to drive technological innovation. Investors tapping into these trends at their early stages of development may find it rewarding if these companies can hold up and thrive in the long run.
- Utilities: By nature, cashflows for utility companies tend to be more predictable. These characteristics lead us to believe that this sector can provide investors with a steady dividend stream. Some utilities companies are renewable energy companies which should benefit from long term net-zero goals.
- REITs: REITs (or Real Estate Investment Trusts) in Asia generally offer a decent yield of 5-6%. By taking a selective approach, we now prefer retail REITs that are also able to benefit from China’s re-opening.
What else can investors consider from the sustainable investment spectrum?
From a longer-term perspective, finding investments that are sustainable in nature will be key to riding on the potential waves of growth in the years to come. Part of this process will be taking a thematic approach when analysing different sectors.
We identified two sustainable themes that are supported by structural trends, which look set to benefit should the movement of interest rates stabilises:
1. Healthcare innovation
According to the Asia-Pacific Report on Population 2022 published by UN Economic and Social Commission for Asia and the Pacific, the fastest growing age group in Asia is those aged over 65 years old. Yet, health budgets in this region are at breaking points just like anywhere else in the world.
Expanding demographic demand, combined with pressured budgets controlling costs and innovation, create the force for change underpinning multi-year structural growth opportunities.
In fact, investment in this theme ties in directly to the UN Sustainable Development Goal 3 – Good health and well-being. Investors can gain exposure to this theme by looking at its value chain and identifying selected companies from sub-themes, such as advanced therapies, medical technology, healthcare services (managing healthcare and telehealth), digital healthcare and wellbeing. Covid-19 has demonstrated the power of innovative treatments and accelerated new healthcare models.
2. Digital transformation
Even though digital-related stocks have experienced significant drawdowns in recent market slumps, we do believe that digital transformation is a theme that is of structural demand in the long run.
In our view, we are transiting to a new innovation cycle – from a fifth wave of digital networks, software, new media, mobile phones and the Internet, to a sixth wave of clean tech, AI (artificial intelligence), IoT (Internet of Things), gene therapy, automation and robotics, and digital finance. Although cyclical, the semiconductor industry is also showing structural growth, and demand is spilling in from non-traditional customers. Smarter services and devices will connect more people to mainstream business activities and resources.
We are watching how disruptive innovation will create opportunities for investors to capture capital growth beyond the near-term horizon.
1 S&P Global Market Intelligence – October 2022.
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