Perspective

Outlook 2020

Outlook 2020: Asian equities


Robin Parbrook

Robin Parbrook

Co-Head of Asian Equity Alternative Investments

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Toby Hudson

Toby Hudson

Head of Asian ex Japan Equity Investments

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  • We expect moderate returns from the region’s stock markets in 2020.
  • Stock selection will remain the key to returns in 2020 as growth will only come from companies that are able to survive and thrive amid such an uncertain economic backdrop.

The events of the past year or two have made Asian markets feel less bound by economic fundamentals and more hostage to unsettling political developments. Many of the long-held assumptions underpinning our Asian investments are being radically challenged.

The ongoing US-China trade tensions have sapped momentum in many regional economies, and we don’t expect any major upswing in economic growth. As a result, we aim to take a micro, rather than macro, approach to stock selection. This involves seeking companies that have the ability to achieve growth based on their competitive advantage or ability to grow market share, rather than due to the economic cycle.

Disruption is here to stay

Technological developments, changing business models, environmental pressures and changing consumer tastes are powerful drivers of disruption in Asian markets. And while these trends have enabled the creation of innovative new businesses, such as Alibaba, they also wreak havoc in many of the more traditional stocks in which we invest.

Traditional retail and media stocks have already been decimated by the onslaught of e-commerce. The disruption is now spreading wider, with the revenues of banks being weakened by new “fin tech” companies and automakers struggling to cope with the shift from petrol to battery technology.

Worries over disruption have caused share price falls in some traditional sectors and stocks can appear cheap on headline valuation multiples. However, we think these kinds of business model disruptions are potentially more damaging than trade tensions or cyclical economic slowdowns. We continue to view many of the out-of-favour sectors as value traps and are cautious on banks, autos, cyclical, heavy industry and commodity names.

Inflation and interest rates likely to remain low

With growth subdued and disruption continuing, inflation is likely to remain depressed and interest rates very low. Against this backdrop, equity dividend yields offer attractive returns that are now well above risk free rates in most Asian markets. Pay-out ratios are still fairly modest in many cases, aggregate balance sheet leverage is below international averages and we have not seen returns boosted by buy-backs to the levels seen in the US.

As a result, there is considerable potential for pay-outs to increase as companies become more willing to distribute surplus case to shareholders.  In a low growth world, we are happy to hold stocks where the bulk of the return is likely to come from dividends provided that we see the potential for dividends to be sustained or ideally grow.

Tech sector could offer growth potential

Many tech stocks have been out of favour for the past two years as global smart phone sales have flattened in the absence of any new must-have apps to prompt consumers to upgrade. However, the digitisation of the global economy continues to accelerate, which will be positive for key Asian technology stocks at the heart of these developments. The imminent launch of 5G networks in many Asian markets over the next two years should bolster demand and we see attractive opportunities for our preferred names in the IT sector.

Strategy remains balanced

Our strategy for Asian equities remains balanced as we move into 2020. Overall market valuations in Asia look reasonable against historical comparisons. However, this masks the fact that sectors such as banks, autos and commodities drag down the headline valuations. The valuations of stocks we want to own are definitely not cheap, so we anticipate moderate returns from the region. However, we have a strong long-term conviction on where the best opportunities are in Asia.

 

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