23 Apr 2021
19/04/2021 | Paras Anand Asia Pacific ex Japan
Paras Anand, CIO of Asset Management, Asia Pacific, debates the investment outlook for the region. After a strong run in regional markets, he outlines why headline returns could be more modest going forward, with potentially significant shifts in market leadership. How should investors approach this new environment?
Over the past few months, we are clearly seeing the benefit from successful pandemic containment across Asia. Most notable is China, which returned to its pre-pandemic level of growth at the end of the fourth quarter of last year. As the recovery deepens in China, we may see continued economic support in research and development, high-end manufacturing and the opening out of financial markets, more so than we would expect to see in terms of spending on fixed asset investment.
From a market perspective, we believe there is a strong case that we will see a shift away from the very highly-valued growth sectors towards a broadening out of market returns. This is likely to persist through the year ‒ not just in Asia, but also in markets globally. This will be a new phenomenon for many investors who have grown used to any value rotations being short and sharp in nature, versus one that could be longer-lasting.
There are three areas that we believe investors should continue to focus on:
1. More modest expectations from markets
The outlook for returns from markets ‒ whether that is bonds or equities ‒ are likely to be more modest over the coming quarters. Whilst we see a very healthy outlook for the real economy, some of this has already been priced into markets. A rotation towards value stocks and sectors will mean that some of the more highly valued areas that are substantial parts of benchmark indices may underperform.
2. Continued pressure on bond markets
We expect continued pressure on bond markets as inflationary pressures build in the real economy.
3. Valuation
We believe that investors should look for that margin of safety in the new capital that is put to work and consider valuation as a core part of their investment strategy.
Outside of China, there are a couple of key areas where we see opportunities. We are positive on the prospects for Japan, where the story is driven less by the macroeconomic picture and more by the level of corporate reform that we are seeing from Japanese companies. So it is that determination to improve underlying returns, married with relatively low valuations ‒ not just within the region, but also globally.
We also believe the South East Asia region will benefit not only from improving global growth and the ambition of economies like the US to diversify supply chains, but also from greater economic integration within the region.
More broadly, we believe other recent developments such as the rapid vaccination rollouts in the US and the UK and rising US yields will be positive for Asia. Rising yields underline a more optimistic outlook for the US and the global economy in general, which will likely be good news for Asian assets. On the vaccine front, we expect to see consumption recover very quickly in these parts of the developed world, which also spells good news for the more export-orientated economies across Asia.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in small and emerging markets can also be more volatile than other more developed markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.