Asia ex Japan equities: Take an active, all-cap approach that is as forward-looking as the region

Text size

This is a sponsored article from PineBridge Investments.

Authors: Siddhartha Singh, Investment Director, Asia Equities, and Caroline Loke, Portfolio Manager, Asia ex-Japan Equities

19 April 2021

“The best time to plant a tree was 20 years ago. The second-best time is now.” Chinese proverb

The world’s economic centre of gravity has shifted to the East. In just the last quarter-century, Asia’s phenomenal growth trajectory has dramatically reshaped the global economy, with an outsize contribution to incremental global growth and a rising share of global GDP.

The long-term investment potential is truly compelling. Asia is home to the world’s largest population of “digital natives”1, will make up 40% of global consumption by 20402, and will add 1.2 billion people to urban areas every year between now and 2050.3 We believe the convergence of several powerful structural trends – including accelerating digitalisation and automation, a rapid transition toward a lower-carbon economy, and an increasingly urban population (among other demographic changes) – will set the stage for a seismic shift in global economic dynamics that creates unique and compelling investment opportunities across all market capitalisations.

Asia’s Relevance in the Global Economy Has Grown Significantly

Source: World Bank, Bloomberg, PineBridge as of December 2019, accessed in February 2021. Asia consists of Vietnam, Thailand, Singapore, Philippines, Malaysia, Korea, Indonesia, India, Hong Kong, and mainland China. Euro consists of Spain, Slovenia, Slovak Republic, Portugal, Netherlands, Malta, Luxembourg, Lithuania, Italy, Ireland, Greece, Germany, France,  Estonia, Cyprus, Belgium, and Austria. Latam consists of Venezuela, Uruguay, Puerto Rico, Peru, Paraguay, Panama, Nicaragua, Mexico, Honduras, Haiti, Guatemala, El Salvador, Ecuador, Dominican Republic, Cuba, Costa Rica, Colombia, Chile, Brazil, Bolivia, and Argentina. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

Resilience from regional connectivity
Closer economic cooperation, along with a boom in intraregional trade, offers the region’s economies a buffer against geopolitical tensions. For instance, the region’s intraregional trade share remained stable at 57.5% in 20194, helping to offset a potential slowing in trade growth. To put this in perspective, intraregional trade in North America and the European Union stood at 40.9% and 63.2%, respectively.4 These strong trade linkages may usher in new opportunities as companies seek to build robust, self-contained regional supply chains to serve both Asian and global markets.

The rise of Asia Inc.
In recent years, Asia has also become home to half of the world’s fastest-growing global companies5 across a wide range of sectors, including industrial, automotive, information technology, finance, and supply chain logistics. Forty percent of companies in the Fortune Global 500 are from East Asia, and three of the top 10 companies on the list are from China.6 Our ground research indicates that a vast majority of the companies we track have responded well to the tough business environment over the past two to three years by raising equity and fortifying their balance sheets, helping them to withstand future shocks and to grow and innovate their businesses. In short, Asia is diverse yet is unified by a common thread: an upward trajectory of economic growth. We believe selectivity through active investing is key to getting the most out of these opportunities.

The case for active investing in a region of big structural shifts
Bellwether indexes do not truly represent the full extent of economic activities in Asia. A company’s presence in the index today typically reflects its “past glory” in terms of performance, which may not necessarily persist into the future because of the amount of disruptive innovations, evolving reforms, and structural changes. That is why the stock markets have either lagged behind or barely matched the growth in underlying economies, even on a longer-term basis.

For Over a Decade, Index Returns in Asia Have Lagged GDP Growth

Source: World Bank, Bloomberg, calculated based on data from end-2008 to end-2019. As starting points, we used the peak points achieved before the Global Financial Crisis hit these markets through 31 December 2020. The starting dates are as follows: MSCI China, 10 October 2007; MSCI India, 31 December 2007; MSCI Korea, 31 October 2007; MSCI Indonesia, 29 February 2008; and MSCI Malaysia, 31 December 2007.  For illustrative purposes only.  We are not soliciting or recommending any action based on this material. 

Asia remains underrepresented in global benchmarks
Despite recent increases in the weightings of large Asian economies in global indexes, Asia ex Japan equities as a whole remain underrepresented. Companies outside North America accounted for less than 40% of the global MSCI ACWI’s market capitalisation, but they contributed almost 70% of total revenues.7 The MSCI Emerging Markets Index accounts for 12.1% of the ACWI but contributed 42% of the ACWI’s global revenues, and four Asian economies (China, Taiwan, Korea, and India) account for three-fourths of the emerging market index’s weight.8 The disconnect between weighting and revenues supports the case for a standalone allocation to Asian equities and a more selective approach at the stock level.

In a market of over 17,000 listed companies9 from diverse markets, sectors, and capitalisations, index replication imposes limits on investors’ opportunity sets. As Asia’s growth trajectory continues to diverge from the rest of the world, we think it’s time for investors to consider the benefits of an actively managed strategy that is as forward-looking as the region. Free from the constraints of index weightings, an active, all-cap approach has the flexibility to adjust capital allocations amid changing company, industry, or macro dynamics – making it a potentially better fit for Asia’s growing markets.

To learn more about opportunities in Asian markets and PineBridge Investments unconstrained, all-caps Asia ex Japan Equity offering, visit pinebridge.com

Footnote
1 Source: Digital natives are generally defined as persons born after 1980. We extrapolate the figure based on UN population estimates for 2020. There are 3.5 billion in Asia aged 49 years old and under, more than any other region in the world.
2 Source: See “The Future of Asia: Asian Flows and Networks are Defining the Next Phase of Globalization”, McKinsey, 18 September 2019. https://www.mckinsey.com/featured-insights/asia-pacific/the-future-of-asia-asian-flows-and-networks-are-defining-the-next-phase-of-globalization#:~:text=On%20consumption%2C%20in%202000%20Asia,39%20percent%20of%20global%20consumption
3 Source: See “The Future of Asian and Pacific Cities”, United Nations Economic and Social Commission for Asia Pacific, 2019. https://www.unescap.org/sites/default/d8files/knowledge-products/Future%20of%20AP%20Cities%20Report%202019.pdf
4 Source: See “Asian Economic Integration Report 2021”, Asian Development Bank as of February 2021
5 Source: See “Asia Is Home to 50% of the World’s Fastest-Growing Companies”, Nikkei Asia Review, 9 May 2019. https://asia.nikkei.com/Business/Companies/Asia-is-home-to-50-of-world-s-fastest-growing-companies
6 Source: See Fortune Global 500 List 2020, as of August 2020. https://fortune.com/global500/
7 Source: MSCI as of December 2020.
8 Source: MSCI as of December 2020.
9 Source: Bloomberg as of 31 December 2020

 

Disclaimer
All investments involve risk, including the loss of principal amount invested. Past performance is not indicative of future results. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. Any views express represent the opinion of the manager and are subject to change. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk. We are not soliciting or recommending any action based on this material. In Hong Kong, this document is issued by PineBridge Investments Asia Limited, a company incorporated in Bermuda with limited liability. This document has not been reviewed by the Securities and Futures Commission (SFC). Hong Kong investors should also note that the website www.pinebridge.com referred to in this document is not specifically directed at Hong Kong residents. Such website has not been reviewed by the SFC and may contain information of funds not authorised by the SFC. In Singapore, this document is issued by PineBridge Investments Singapore Limited (Company Reg. No. 199602054E), licensed and regulated by the Monetary Authority of Singapore (MAS). This advertisement or publication has not been reviewed by the MAS. Singapore investors should also note that the website www.pinebridge.com referred to in this document is not specifically directed at Singapore residents. Such website has not been reviewed by the MAS and may contain information of funds not authorised by the MAS.

This is a sponsored article from PineBridge Investments.

Related Tags

Company