A burgeoning force in the global economic order

A promising future


While it has become Asia’s largest economy, it is important to remember that there is much more to the continent than just China. The region comprises an extremely diverse range of dynamic economies with exciting prospects. There’s India, the world’s fifth-largest economy, South Korea and Taiwan, famed for their advanced technological enterprises, and rapidly developing nations like Indonesia, the Philippines and Vietnam, to name a few.

In its 2024 World Economic Outlook, the International Monetary Fund forecasts emerging and developing Asia to be the fastest-growing region globally in the next two years, with India and Indonesia leading the way². 

Asia has made great progress in recent years, and its future looks just as promising. As the largest and most populous continent in world, with rapidly expanding economies, there are good reasons to expect that Asia will continue to grow in prominence. Thanks to positive demographic and economic trends, the 21st century has often been dubbed the ‘Asian century’.

Labels aside, the ongoing rebalancing of the global economy from the West to the East in the coming years could be a compelling reason for long-term equity investors to look for opportunities in Asia. 

Has China fallen out of favour?

As the dominant economy in Asia, it is impossible to ignore China when considering investing in the region. However, it would be fair to say that a number of concerns about China have significantly dampened investor sentiment in recent years.

Disappointment that the economy didn’t rebound as strongly as expected last year when China reopened after Covid-19 has fuelled worries about the macroeconomic outlook. However, investors’ main concern about China’s economy arguably relates to the troubled real estate sector. After years of debt-fuelled growth, rising prices and speculative investment, the property sector had become a major source of potential financial instability.

In 2020, policymakers stepped in to “burst the property bubble” and stabilise the sector. “The process has been messy and painful and probably a lot worse than policymakers expected when they started,” says Perrett. While the effects could be felt for another year or more, he is encouraged that “the biggest issue that investors were worried about is now being addressed”.

Besides the macroeconomic outlook, ongoing geopolitical tensions with the US over issues such as trade and Taiwan are unsettling investors. These factors have added to investors’ nervousness about Chinese policymaking, following unexpected government crackdowns on technology firms and education providers in recent years.

The result is that both overseas and domestic investors have become very cautious about Chinese equities. China’s stock market has declined for three consecutive years and has lost $7 trillion in value since its peak in 2021. There have been numerous headlines describing China as “uninvestable”. This situation is a stark contrast to the optimism seen a decade ago.
 

Opportunities amid uncertainty

While accepting there are risks associated with investing in China, Perrett suggests that investors’ fears are creating attractive opportunities for selective, long-term investors.

“Valuations of Chinese stocks are currently extremely low, and we think some good businesses have been unfairly caught up in the negative sentiment”, says Perrett.

In times of uncertainty, stocks often get sold indiscriminately across the board. In the current market, Perrett highlights stocks that are trading below the value of the net cash on their balance sheet, non-cyclical companies (not economically sensitive) with high dividend yields, as examples of companies that are being overlooked.

“We also see some excellent global companies, either globally competitive in China, or maybe even global companies that just happen to be listed in Hong Kong, that trade at huge discounts compared to their global peers. Given what is being priced in and the risk of ownership, we think there are plenty of interesting opportunities from a bottom-up point of view.”

Leading the energy transition

According to Perrett, the preoccupation with the economic outlook is leading investors to overlook some of the long-term structural opportunities that exist in China. A key area is energy transition, where China is the global leader. “If the world is going to succeed in combatting climate change, Asia will be the key battleground,” Perrett observes. “Very encouragingly, in 2020 China pledged a net-zero goal by 2060 and since then it has been investing heavily in renewables.”

China’s shift to a cleaner energy future is likely to present a number of opportunities in areas such as solar, wind power, electric vehicles (EVs) and supply chain management. The market already offers world-leading firms in environmentally friendly technologies such as solar panels and EVs, which will likely have a tangible impact on global markets over the next decade.

Perrett points to EV maker BYD, which is China’s best-selling car brand and, in the final quarter of 2023, was the world’s number one selling EV company, ahead of Tesla. “In other markets, these businesses would trade at much higher multiples but in China the macroeconomic concerns mean structural ‘winners’ are being thrown out with the bath water, “ he comments.

Many investors have lost confidence in China and are hoping the government will take steps to support the economy and boost sentiment. Irrespective of whether policymakers introduce stimulus measures to revive confidence, as a patient stock picker, Perrett believes that China offers plenty of companies with exciting long-term prospects at attractive valuations.

Investors have flocked to India

Pivoting from China to India, the other economic powerhouse in the region, we find a very different picture. India has been extremely popular with investors and the stock market has soared in recent years. The country has experienced a decade of economic progress, modernisation and rising wealth since Narendra Modi became prime minister in 2014.

From an investment perspective, India offers a broad and deep opportunity set, spanning a wide range of sectors such as automotive, cement, hospital, infrastructure and financial services. However, at the present time finding value is more difficult as “the market has become expensive, particularly consumer-related stocks”, according to Perrett.

Favourable demographics

In contrast, Indonesia is an interesting source of bottom-up ideas for Perrett. “This is a fast-growing economy with favourable demographics in terms of the young population,” he says.

“We think the banks are well-run and there is scope for credit growth as the economy develops. The country is also resource-rich and strategically it is well placed between China and the US, which could be valuable diplomatically.”

VAT: Value-added thinking

One of the most positive changes which Perrett has witnessed over the past decade in Asia is a shift among corporates towards becoming more open to engagement with shareholders, and a greater willingness to accept suggestions.

“By engaging respectfully as a long-term investment partner, it is possible to help firms improve in various ways, ranging from capital allocation to corporate governance or sustainability actions. We call this ‘value-added shareholdership’ and we think it can be a powerful way of adding value to our investments,” he says.

Against a backdrop of dynamic economic growth and improving corporate behaviour, Perrett remains optimistic that the potential rewards for patient, engaged stock pickers in Asia in the coming years could be very exciting indeed.