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.
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.
“Such a process helps us identify companies with strong balance sheets, and which possess competitive advantages in areas like products, brand or technology,” said Mr Ben Sheehan, senior investment specialist, Asian equities at Aberdeen Standard Investments.
“It also helps us screen out the weaker companies that are at risk of being left behind amid the changes wrought by Covid-19,” he added.
A STRONG EMPHASIS ON ESG
Aberdeen Standard Investments pays close attention to Environmental, Social and Governance (ESG) considerations as it believes companies that care about doing the right thing will deliver better returns to shareholders over time. The asset manager has a team of over 50 ESG specialists who engages boards and management on various ESG issues to identify the best companies to invest in.
This emphasis on ESG has borne fruit on many occasions, including in China where Aberdeen Standard Investments is a long-time investor in one of the country’s largest cement producers.
Mr Sheehan said: “We were initially cautious on cement makers due the risks of regulation and the cyclicality of demand. During the course of research, however, we found a Chinese company whose manufacturing facilities were best-in-class. We also predicted correctly that pollution control measures would remove a significant amount of supply as competitors shut down.”
“These insights were a direct consequence of our environmental-impact analysis,” he added.
Closely tracking the main equity benchmarks through exchange-traded funds (ETFs) may be cheaper for investors in terms of fees, but this means indiscriminately buying into companies based on their size and missing out on potential winners. Passive funds can’t avoid weaker companies because they hold everything, both good and bad.
As financial distress exposes weaker firms, investors will need to assess opportunities stock by stock.
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.
Mr Sheehan added: “Asian companies have also moved up the innovation ladder and are now major global players in technology supply chains, e-commerce, cloud and digital media. This is unlike some 20 years ago, when the West and Japan led in many technology areas.”
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.
China is now an old hand at managing crises. To all intents and purposes, it contained the Covid-19 outbreak in one province (Hubei), sparing huge populations in cities such as Shanghai, Guangzhou and Shenzhen from the brunt of this pandemic, Sheehan said.
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.
KEY INVESTMENT THEMES
In Asia-Pacific equity markets, Aberdeen Standard Investments believes that growth is best captured by focusing on four key long-term investment themes.
The first revolves around 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.
The second focuses on Asia’s 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.
A third theme is 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.
Aberdeen Standard Investments’ fourth investment theme is 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.
While stock markets around the world have recovered in recent weeks, most Asian stocks still trade below their levels in late January before the coronavirus started spreading beyond China.
On a trailing price-to-book basis, the widely followed MSCI AC Asia Pacific ex-Japan Index was trading at a 15-per-cent discount to its 10-year average and an over a 60-per-cent discount to the S&P500 as of June 5, 2020.
To put it simply, there is a lot of value in Asia-Pacific stocks. Investors could consider looking at this region for investment opportunities.
For more information about Aberdeen Standard Investments approach on Active Equities and ESG Investing, please visit this website.
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