Résumé
Our Asia investment experts and European clients recently met in Berlin for our 11th annual Asia Conference. We think the world’s most dynamic region holds fundamental attractiveness for investors – even amid current trade tensions.
Key takeaways
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As long-term investors, we think the engine powering global growth in the coming decades will be Asia and its large, growing consumer and services markets. Developed economies are ageing and facing unsustainable social-services commitments, and their business models largely depend on high levels of debt and easy money from central banks. While significantly less wealthy, Asia has a youthful population of nearly 4.5 billion and a growing desire to reduce its dependence on the West – which gives Asia an important strategic resonance for investors.
More immediately, despite the 2019 bounce-back in Asian stockmarkets, Asian equities still appear attractively valued. Last year’s bout of underperformance appears largely driven by trade concerns, but corporate fundamentals and earnings are attractive, and corporate-debt levels are lower in Asia than in many developed markets. We also find that Asian and other emerging-market bonds offer a compelling long-term story for investors on the hunt for income, with cumulative total returns that are particularly attractive compared with low- or negative-yielding European bonds.
So with Asia set to power global economic growth in the coming decades, here are the key themes investors should watch.
Trade and politics are inextricably linked
Under President Donald Trump, the United States is aggressively renegotiating many long-standing global agreements – including withdrawing from the Trans-Pacific Partnership (TPP), pushing back on South Korea and Japan over military spending, and imposing new trade terms on China. The US has also fired the opening salvos in a US-China “tech cold war”.
These conflicts are creating economic uncertainty around the world, but they may end up benefiting Asian nations as they build up long-term alliances with one another. For example, if continued political pressure ramps up the tech cold war, Asian countries could side with China and become part of its tech ecosystem. At the same time, this would likely disrupt the consumer markets and supply chains of many established global tech companies, hurting their profit margins and underscoring the need for investors to be active and selective in this space.
Asia will resolve key political questions this year, with India, Indonesia, Australia and Japan holding important elections. Thailand and Malaysia are also facing their own internal struggles. But there is evidence to make us think that many Asian countries – particularly India, Indonesia and China, which are already reform-minded – will continue to move in the direction of reform and transparency.
China should increasingly be viewed as an asset class
For several years, we’ve advised our clients that it’s no longer a question of whether to allocate to China – but how much. Beyond having the world’s second-largest economy, China’s financial markets are large and deep, and the country is opening up to global investors. There are certainly legitimate concerns about the potential for prolonged trade wars, and about the environmental, social and governance (ESG) factors that many Chinese companies are struggling with but improving slowly. These issues reinforce the importance of conducting in-depth research and taking an active, selective approach to this market.
Overall, Chinese equities and bonds are under-owned and seem undervalued, especially given China’s focus on stabilising growth while reducing bad lending practices. We expect concerns over China’s debt levels and currency to fade, bringing more investment into Chinese bond and credit markets and providing the country with the capital it will need in the coming years.
China has completely transformed its economy in a matter of decades
| Key indicators | China in 1978 | China today |
|---|---|---|
| % of global GDP | 1.8% | 15.2% |
| GDP per capita | USD 156 | USD 8,823 |
| Poverty rate | 97.5% | 3.1% |
| Economic pillar | Agriculture & industry: 75% of GDP |
Services: 52% of GDP |
| State vs private | No private sector | Private sector 60%+ GDP |
| Financial markets | No stock exchanges or bond market |
Second-largest global stock market |
Source: World Bank Database, Xinhua Net, Allianz Global Investors. Data as at 2018.
India’s reforms could be transformational
India is still building new foundations for future economic growth, drawing on its rich heritage of diverse cultures and the huge demographic advantages of its young population. Yet not many companies have been able to tap India’s vast consumer potential, so identifying those successful firms could be a big opportunity for investors. India is also attempting to implement broad-based reforms, focusing on improving openness, reducing corruption and improving social services. The biometrics-based identification system called Aadhaar is a great example of the government’s efforts. We expect to see further reforms enacted in the coming years – perhaps to the state-owned banks and their bad debts.
Millennials are set to remake Asia
Around the world, baby-boomers are ageing out of the workforce and millennials are taking over. Nowhere is this more evident than in Asia, where significant demographic shifts are underway. The traditional model of big families in rural areas supporting themselves with physical labour is giving way to the era of urban, educated, ambitious individuals who are increasingly tech-savvy. This dynamic makes Asia a go-to investment opportunity for regional and global companies, who can pick from a field of talented STEM (science, technology, engineering and mathematics) graduates while tapping large consumer markets. But Asia’s generational transformation is not without its challenges: for example, policymakers must now think of new ways to provide India’s elderly with social services while not overly burdening its youth.Technology is at the core of Asia’s rise
Compared with its older Western counterparts, the younger Asia has found it much easier to build high-tech infrastructure that embraces innovation. This has helped the region adopt disruptive new technologies and apply them beyond the tech sector – including health care, finance and telecom. Grassroots® Research – our proprietary in-house research division – has identified a large demand for new medical services built around unstaffed, AI-powered walk-in clinics. Ideas like these could help Asia leapfrog some of the developmental stages of more advanced economies, allowing the region to become even more competitive, more accessible and faster-growing.
Grassroots® Research is a division of Allianz Global Investors that commissions investigative market research for asset-management professionals. Research data used to generate Grassroots® Research reports are received from independent, third-party contractors who supply research that, as far as permissible by applicable laws and regulations, may be paid for by commissions generated by trades executed on behalf of clients.
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Résumé
After a strong start to 2019, the markets abruptly turned volatile. The global economy looks increasingly fragmented, and our mid-year outlook calls for more unease over trade tensions and politics. While there are no easy answers, we suggest investors focus on ESG, hunt for income and invest actively.
Key takeaways
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