Focusing on companies geared to large domestic markets and structural growth areas
The ongoing debate on whether inflation will force sooner-than-expected monetary tightening has been joined by the worry that new waves of the Delta variant will delay the anticipated recovery by the economy.
More than four years ago, we had presented the argument that “big tech” in China was in fact similar to regulated utilities in other parts of the world – ubiquitous, nearly free, serving a public utility function (ordering food, getting to work, buying groceries, booking restaurants, shopping, and everything else in between), and relying heavily on government support – and therefore, ought to be valued as such. At the time, it was an interesting line of thought, but today, it is a rude reality. That it affects benchmark index heavyweights in the largest market in the Asian/global emerging markets investment universe only magnifies the conundrum facing investors.
Against this backdrop, and with globalisation having peaked some time ago, our focus remains on companies geared to large domestic markets and areas of structural growth, such as pockets of technology, healthcare and decarbonisation.
China’s move to tackle the ‘three big mountains’ – property, healthcare and education – has forced a fundamental rethink of the risk premium implicit in investing in Chinese equities. This is especially pronounced in sectors that have borne the brunt of China’s policies. With collateral damage affecting most companies, we remain focused on domestically orientated quality companies in areas with a more favourable policy backdrop, such as the environment, industrial upgrade and healthcare.
Selective in South Korea and Taiwan
Rising tensions with China (this time owing to the Biden administration’s efforts to deepen ties with Taiwan), extended equity valuations, and elevated Covid-19 cases warrant a selective approach in Taiwan. A similarly high Covid-19 caseload and tightening monetary policy necessitate careful navigation in South Korea. Nonetheless, we continue to find attractive opportunities in content creation, healthcare and some of the tech sub-sectors.
Resurgent waves of Covid-19 have plagued ASEAN and India, stymying any economic recovery, while vaccination rates remain low in these countries.
In India, reforms initiated over the past couple of years have not meaningfully benefited the economy, owing to languishing economic growth. The view remains that barring a fresh and deadly wave of Covid-19, India’s economy will recover in the coming quarters, albeit in spurts, and the steady formalisation and digitisation of the economy offer opportunities in logistics, real estate, private sector banks and the “new” economy.
Indonesia’s patchy progress on reform plus continual political debacles in Thailand and Malaysia leave us unenthused. In the ASEAN region, only sporadic opportunities in the digital economy and decarbonisation excite us.
By Nikko Asset Management’s global equity team
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