19 Aug 2020
Advertorial
First to emerge from the coronavirus pandemic, the Asia ex Japan region is in robust health and its innovative companies are thriving. Roderick Snell, co-manager of the Baillie Gifford Pacific Fund and deputy manager of Pacific Horizon Investment Trust, surveys the Asian landscape and argues that Asia is the place to look for superior long-term growth.
As with any investment, your clients’ capital is at risk.
Asia ex Japan was the first region to enter the coronavirus (Covid-19) crisis and, as it emerges, we can see that Asian countries are generally returning to normality in reasonable financial strength. The modest financial stimulus and monetary response observed across the region stands in stark contrast to the many trillions of dollars being deployed by western economies, where such profligacy will be a major financial burden for years to come, leading to slower growth and potentially weaker currencies. The majority of Asia ex Japan looks attractively placed in comparison.
The world is now awash with trillions of dollars of stimulus seeking an economic return, and we ask ourselves where does this capital flow to? The increasingly debt-laden economies of the west, where near-zero or even negative interest rates look set to persist for many more years? Or the faster structural growth of Asia ex Japan, combined with limited balance sheet expansion and reasonable yields and interest rates? If the latter is correct, such an inflection point would be extremely supportive for Asian assets over the coming decade.
An important change through the crisis has been an acceleration in the adoption of technology, improving economies of scale and strengthening the competitive moats around some leading technology firms. We believe this key trend will persist. China has arguably led the way, with several of the country’s internet companies seeing significant increases in user numbers and engagement under lockdown. Meituan Dianping, the online food delivery business, experienced a 400 per cent increase in grocery deliveries and employed more than 330,000 new delivery drivers. JD.com had to hire 20,000 new logistics employees to help with increasing ecommerce orders, while DingTalk, owned by Alibaba and considered the world’s largest collaboration service designed for companies, experienced downloads increasing fifteen-fold.
We have also seen an acceleration of innovation across the traditionally less technology-savvy parts of the region. Just as SARS was a turning point in the birth of ecommerce in China in 2003, helping to establish companies such as Alibaba and JD.com, we believe Covid-19 could be doing the same for ecommerce across large parts of the ASEAN region.
ASEAN governments are also becoming more supportive of the online economy, quickly realising it is a far more effective medium for collecting tax receipts compared with offline cash transactions. We see a permanently higher shift in the adoption of the online economy across South East Asia.
However, the potential impact of the virus on the development of competitive dynamics is arguably even more important than this surge of technology use. Surging demand initiated by Covid-19, has dramatically shortened the time required for companies to scale up and achieve dominance. The winners will establish themselves over the next couple of years rather than decades. This reduced timeframe will curtail the number of competitors entering the market, and profits will accrue to an increasingly small number of existing players. An enduring feature of this crisis is likely to be the strong getting stronger.
Although increasing tensions with the west and a desire to diversify supply chains are likely long-term headwinds for Chinese export growth, this trend will create many specific winners and losers. We believe Vietnam will be one of the biggest beneficiaries. The country has already been the major winner from the relocation of manufacturing away from China, and any acceleration of this trend will fuel Vietnam’s exports further.
If the current global crisis is likely to create new secular trends and spur innovation, we believe Asia ex Japan could be one of the major beneficiaries. The region is coming out of this crisis first, in significantly better financial shape than western economies, with superior long-term growth prospects and more attractive valuations. The year 2020 may well be an inflection point where Asia ex Japan becomes a favoured asset class over the coming decade. We believe our strategy of growth companies focused on technology and innovation is extremely well placed in such an environment. Investors should turn their attention to the east.
FOR FINANCIAL ADVISERS ONLY, NOT RETAIL INVESTORS.
This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are those of Roderick Snell, are not statements of fact, and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. The investments trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the FCA. All data is sourced from Baillie Gifford & Co unless otherwise stated.