Juliana Hansveden, lead portfolio manager of Nordea’s Emerging Stars Equity Strategy
Asian equities have witnessed strong performance over the past year, supported by early Covid-19 lockdowns and subsequent early economic reopening. China, in particular, performed exceptionally well in managing both the health and the economic impact of the pandemic. Strict and early lockdowns kept infections under control in 2020, which allowed China to reopen early and led to a swift recovery in all major economic metrics. In fact, China was the only G20 economy with positive GDP last year, with growth of 2.3%. This spilled over to other Asian markets, which in general outperformed developed markets.
Looking ahead, real GDP growth in Asia Ex-Japan is forecast to return to its pre-Covid-19 level of 5.4% in 2021. Growth in China and in India is estimated at 8-9% year-on-year, outpacing growth in other countries within the region – while contributing most to global GDP. Compared to expected developed market growth of 4.2%, the environment continues to look favourable for Asian equities.
While Asia is expected to contribute 60% to global growth by 2030, Asian equities are still under-represented in global benchmarks and investor portfolios. Below, we outline the reasons why investors should be confident of continued Asian dominance, as well as some of the structural drivers powering the rapidly growing region.
Covid-19 under better control
In North Asia, especially in China, the rate of infection seems to be under control. These markets keep on reopening to a greater extent than elsewhere globally. We expect the Chinese economy to deliver strong growth this year as it benefits from both cyclical and structural tailwinds – in areas such as industrial automation, electric vehicles and components and supply chain localisation.
RCEP zone is the future of Asia
Asia is now taking on the role of the new engine of global growth, with China the hub for trade in the region. The RCEP – Regional Comprehensive Economic Partnership – will bring Asia a step closer to becoming an integrated trading zone like the EU. This trade deal will reduce economic frictions and, according to analysts, add US$500bn annually to world trade. The biggest beneficiaries will be RECP members – China, Japan, South Korea, Australia, New Zealand, as well as 10 other Southeast Asian countries.
More room for monetary easing
Compared to other regions, conditions in Asia would allow a further stimulus for the economy – if needed. Higher general yield levels, relatively stable foreign exchange markets and low inflation levels are supportive drivers of further monetary easings to boost economic growth.
Consumption powers Asian growth
The rising purchasing power of Asian consumers indicates opportunities in many consumer-related businesses. This goes far beyond the purely internet-related names Asia is known for and includes among others sportswear and staples consumption. One lockdown trend we expect to continue in Asia is the rise of e-commerce. Its penetration is unlikely to recede, as consumers are hooked on the added convenience of these services. Asian consumers are also expected to re-engage in offline activities badly affected by the pandemic.
Technology meets sustainability
Tech was one of the main winners in 2020, benefitting from an accelerated shift in consumer behaviour, and we are optimistic about the longer-term outlook for many of the main Asian players. New technology like AI, automation, 5G and biotech will continue to perform as a result of the pandemic. Meanwhile, the digitisation of many areas of the economy will continue. We expect digital adoption in South East Asia to catch up with China, which drives demand for increased processor power, bandwidth and storage. There will be more attention on sustainability-related industries such as electric vehicles, battery storage and supply chain, as countries around the world place stronger emphasis on climate change. Indeed, the commitment to reduce greenhouse gas emission will most likely accelerate the development and adoption of electric vehicles and energy efficient products, also inducing growth in the ecosystem of renewable energy and resources.
Cheap equities and rising currency
Moreover, from a valuation perspective, Asian equities are trading at 20% discount against developed market equities – with future earnings growth expected to be higher. This is mainly because Asia is still benefiting from external demand, particularly when growth in DM will be propped up by fiscal policy that will in turn support Asian exports. In combination with a weak US dollar, which according to analyst consensus is expected to stay under pressure in 2021, the scene seems to be set for a bright EM equity year. Historically, there has been a high correlation between a weak US dollar and EM equities outperforming DM equivalents.
Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and representative offices. This document is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest key investor information document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. The Legal Entities’ branches, subsidiaries and representative offices are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Fund S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and representative offices. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or representative offices.