Asia will continue to prosper, but investors must be discerning

by Aberdeen Standard Investments

07 July 2020

Asia-Pacific stock markets are recovering as economies reopen, but the road ahead is fraught with risks as the disruptions unleashed by the Covid-19 pandemic mean that some companies will thrive even as others fall by the wayside.

As financial distress exposes weaker firms, investors will need to assess opportunities stock by stock.

Against this backdrop, Aberdeen Standard Investments – the largest active manager in the UK and one of Europe’s largest investment companies - believes an active, quality-focused approach to selecting equities would continue to be the best way to deliver long-term returns for clients.

Asia-Pacific & Key Investment Themes

One region favoured by Aberdeen Standard Investments is the Asia-Pacific, which is home to half the world’s population and accounts for nearly half of global gross domestic product. The region is – and will continue to be – the structural engine powering the world economy as rapid urbanisation and income growth create demand for new goods and services.

In addition, the Covid-19 pandemic has shown how effective Asia-Pacific governments from China to New Zealand are at dealing with crises compared with their counterparts in the West.

While there are risks on the horizon, including slower global growth compared to the days before Covid-19, Aberdeen Standard Investments believes that large and sustained stimuli from governments and central banks will offer continued support to markets.

In Asia-Pacific equity markets, Aberdeen Standard Investments believes that growth is best captured by focusing on four key long-term investment theme:

(1)   Aspiration: As Asia’s rising affluence propels demand for premium consumer goods, financial services, food and beverage and as well as experiences such as travel.

(2)   Digital Future: Where the region’s large number of tech-savvy youth and improving connectivity has translated to growth in areas such as gaming, financial technology and various other internet and cloud-based services.

(3)   Tech Enablers: As Asia’s technology supply chains are well positioned for structural growth related to the rollout of 5G mobile services, big data and the Internet of Things.

(4)   Building Asia: While much has been said about China’s rapid growth, other Asian countries are also seeing rapid rates of urbanisation and infrastructure development, which will benefit property developers as well as suppliers of materials such as cement producers.

China-A & Key Investment Themes

Within Asia Pacific, Aberdeen Standard Investments also views China as an attractive investment destination. Capital market reforms, while in their infancy, are moving in a positive direction. Financial reporting and disclosures are also trending to international norms. Importantly, structural growth opportunities abound, especially as they relate to fast-growing premium consumption.

There are approximately 3,728 A-shares listed in mainland China. These are renminbi-denominated shares traded on the Shanghai and Shenzhen exchanges. They boast a combined market capitalisation of some US$6.8 trillion as of end June 2020.

For decades the onshore market developed in isolation. Few foreign investors followed A-shares. Even today, an unsophisticated local investor base that reacts to domestic rather than external factors, drives this market. As a result, the A-share market tends not to transmit global shocks with the same intensity as markets elsewhere. The onshore market has therefore been an effective way for foreign investors to diversify a portfolio.

In China A-Share equity markets, Aberdeen Standard Investments believes that growth is best captured by focusing on four key long-term investment theme:

(1)   Spending Switch: Resilient companies benefiting from change in work and consumption patterns following the outbreak of COVID-19. This includes plays on cloud computing, cyber-security, online grocery deliveries and a thermal camera maker.

(2)   Higher-End Food & Beverages: With wages on the rise, we see strong prospects in higher-end food and beverage producers including liquor, milk and soy sauce.

(3)   Life Insurance: Chinese insurers are improving their mix towards life insurance and away from savings products. Life insurance is under-penetrated, which bodes well for future growth in premiums.

(4)   Health and Wellbeing: Rising disposable incomes are driving demand for healthcare products and services. The opportunity set is diverse. Our holdings include a leading hospital; a contract research provider for the pharma industry; and traditional Chinese medicine manufacturers.

In Conclusion

While stock markets around the world have recovered in recent weeks, there is a lot of value in Asia-Pacific and China-A stocks. Investors could consider looking at this region for investment opportunities.

Find out more Aberdeen Standard Pacific Equity Fund and Aberdeen Standard SICAV I – China A Share Equity Fund

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