29 Jul 2021
Paras Anand, Chief Investment Officer, Asia Pacific, at Fidelity International.
Key points
Dollar weakness, commodity strength and rebounding global growth are driving the EM economic upturn.
We see the potential for further long-term growth in the ASEAN (Association of Southeast Asia Nations) bloc due to demographic advantages, growing levels of consumption and its digital transformation story.
Japan presents a unique opportunity for portfolio diversification, offering prospects for positive returns but with greater resilience in what will be an increasingly volatile market.
Against a backdrop of supportive policy measures, accelerating vaccination programmes, and the release of pent-up demand, the global recovery is gathering pace. An increasingly visible beneficiary of this upturn will be emerging market (EM) assets.
This development stems from a “triple-merit scenario.” Firstly, the US is undertaking an elevated level of stimulus that is underpinning dollar weakness – a tailwind for many emerging countries. Secondly, current commodity market strength, which, if anything, should gather pace as production ramps up. Finally, a strong recovery in economic activity globally will act as a source of demand and support for EM.
Against this backdrop, we believe that investors should think ahead to a post-pandemic world and consider the central role global EM could play in a diversified portfolio.
Among all the emerging regions, we are increasingly focusing on a large and somewhat underappreciated segment – the ASEAN bloc. This group of mainly developing countries is already laying a pathway for superior growth over the coming years and possibly decades.
To begin with, the ASEAN bloc possesses a clear demographic advantage. For example, Indonesia has a population of over 270 million. Yet, a mere 6% of its people were aged 65 and older in 2020 – a third of that seen in the United States and the European Union.
ASEAN: Large youth base today supports growing working population ahead
Levels of consumption are also rising and now form an increasingly important element of ASEAN gross domestic product. This is because people are both earning and aspiring, focusing on items that had previously been seen as non-essential luxuries.
In addition to the consumption trend is the digital transformation story. This tells us that the rate of economic and social inclusion is gathering pace, as more people gain access to products and services.
Sequentially, a broader and more attractive range of technology-enabled companies should emerge - and so, in addition to substantial demand drivers, the shape of the corporate sector and subsequent opportunities for investors will evolve.
Outside of the regions fastest-growing economies, there is a nation in the region that could add some developed market balance to an investment portfolio - Japan. Although the country has been characterised by low inflation and growth, as well as similar demographics to those in Europe, it does boast significantly higher earnings. Moreover, Japan also enjoys robust internal drivers, especially among corporates where profits have tripled since 2010.
If we look at balance sheets, then Japanese companies have maintained high levels of liquidity. What’s more, they are prioritising returns to minority shareholders through dividends and share buybacks, which have held-up relatively well during the pandemic.
Balance sheet strength: Japanese companies’ comparatively high net cash
Japan’s largely export-driven corporate sector has also doubled up on its restructuring efforts. This should play out favourably in a global environment where activity is set to accelerate.
Given this, we feel that Japan can offer the same risk-reward opportunities as EM, but with greater resilience. It presents an almost unique combination of risk management and attractive valuations with the scope for solid returns.
Unlike emerging Asia, China appears to have moderated its growth ambitions. The Chinese economy of the future will concentrate more on internal drivers, such as upper-tier consumers, research and development, as well as services.
With China rotating away from its traditional focus on fixed asset investment, ASEAN nations are expected to pick-up the baton and grow at a much higher level relative to anywhere else in the region.
One area worth watching particularly closely is China’s fixed income market. The People’s Bank of China declined to introduce the high levels of monetary stimulus we saw emanating from the European Central Bank and the US Federal Reserve.
As a result, China’s increasingly accessible onshore bond market now presents new opportunities for global investors, given the attractive yields on offer and, of course, that all-important issue of diversification.
Fixed income opportunities: 10-year government bond yields
There is little question that a new regime for the global economy is at hand. Given this fact, there are sound reasons to consider an increasing allocation to global EM and particularly Asia. While these countries have, up to now, lagged in their long-term average returns, we see healthy long-term prospects, with blocs, such as ASEAN, increasingly assuming a leadership role in terms of growth.
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 investments in overseas markets. Investments in emerging markets can be more volatile than in other more developed markets. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuer's ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between different government issuers as well as between different corporate issuers. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only.