Asia ex-Japan equities to outperform as fundamentals stay intact

Shou Pin Choo, PM of Asian equities says that economic growth in Asia will be underpinned by investments in education, infrastructure and research & development.

04 May 2021

This article first appeared in The Edge

Despite the ongoing Covid-19 pandemic, Asia excluding Japan equities have performed exceptionally well over the past 12 months.

Most equity markets in the region have rebounded from their respective lows at the height of the pandemic; some have even hit new highs.

Choo Shou Pin, portfolio manager of Asia equities at UBS Asset Management, says the recovery in Asia ex-Japan equities can be attributed to steady economic growth in China, Taiwan and Vietnam.

“These three are among the few countries that registered positive GDP growth in 2020,” he says at The Edge Singapore’s Fund Watch webcast on April 27.

Choo says he continues to be optimistic on Asia ex-Japan equities given the strong economic growth in Asian emerging markets (EMs) for the long-term

Large working age population drives long-term economic growth in Asia

The long-term economic growth, he explains, will be driven by a large working age population in Asian EMs over the next 30 years. This contrasts with the working age population in developed markets (DMs), which is on a decline. The long-term economic growth, he adds, will also be underpinned by significant investments in education, infrastructure and research & development.

Meanwhile, companies in the region continue to have strong balance sheets.

Choo points out that Asia ex-Japan companies have lower debt to equity ratio compared to others in the US and Europe.

Although this has increased over the last three years, he says their ability to repay debt is at a “comfortable” level. “So, this actually sets the stage for us to have a very positive outlook for the region going forward,” he says.

Three themes in Asian equities investing

Choo notes that he sees opportunities for Asia ex-Japan equities through three themes.

For one, technology is used increasingly for many activities, which require more semiconductors to be manufactured.

Choo says the best dynamic random-access memory (DRAM) companies are in Asia as they have gained market share and improved their bottom line over the last decade. Even the US has rolled out the red carpet, inviting DRAM companies – such as Taiwan Semiconductor Manufacturing Company and Samsung – to expand their production there, he notes.

“We think the runway for growth is actually quite good,” he says.

Secondly, credit services in Asia are expected to increase as economies in the region expand further.

Choo points out that credit penetration in many Asian EMs is still lagging DMs, implying that the growth potential is higher.

“If we can find banks that would continue to take market shares in these economies, then those are good investment candidates,” he says.

Finally, as Asian EMs continue to develop, their populations increasingly become more affluent, resulting in lifestyle and consumption changes.

Choo says demand is shifting to premium goods and services from basic and functional ones.

For instance, India’s demand for food, beverage and tobacco goods has dropped to 30% in 2019 from 47% in 2000. On the other hand, the country’s demand for transport and communication services has grown to about 20% in 2019 from about 15% in 2000.

Invest across market caps in Asian equities

So, how does Choo translate these themes into his investing strategy?

Choo says he favours large cap names as they tend to be global and industry leaders.

This, however, does not discount small and mid-cap companies. He adds that such companies provide a “long runway for growth”, greater price discovery potential and diversification of risks.

Still, with the run up in Asia ex-Japan equities, are valuations stretched? While Choo concedes that their valuations are historically at the higher end, he believes they are not “overvalued”. He says their valuations are justified owing to Asia’s strong fundamentals.

So, the important thing for us is to find good companies that are able to deliver good earnings. And if that's the case, then the valuations can be sustained

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