HUB EXCLUSIVES PANEL DISCUSSION 2023 – THE ASIAN ECONOMIC LANDSCAPE
Panel discussion, hosted by Cherry Reynard, with:
Will Scholes, Manager of the Premier Miton Emerging Markets Sustainable Fund, Premier Miton Investors
Sam Konrad, Investment Manager in the Jupiter Asian Equity Income team, Jupiter Asset Management
Tim Erskine-Murray, Investment Specialist Director, Baillie Gifford
There are mixed reports on Asia’s economy today. On the one hand, there are fears that China’s weakness will depress the whole region. On the other, Asia’s economies appear to have side-stepped many of the problems that are weighing on Western economies – such as inflation, debt, economic stagnation. The reality? Well, it’s complicated.
The region is diverse. Tim Erskine-Murray, client services director, Asian equities at Baillie Gifford, says: “At the top of the tree, there is Singapore with GDP per capita of $67,000 per annum. At the other end, there is India, with a GDP per capital of $2,000. There is a spread inbetween with China in the middle at around $11,000.”
That presents a breadth of opportunities – value, growth and income - depending on an investor’s taste. Erskine-Murray says: “Lower income countries can play economic catch-up. Most of the evidence shows that if these countries do emerge, it is likely to be because they have built up a manufacturing export base. In India, 40% of the population works in agriculture, but it’s only 20% of GDP. If you can move them into higher productivity manufacturing jobs, there’s a great opportunity there.”
Exporters versus demographic dividend countries
Will Scholes, manager of the Premier Miton Emerging Markets Sustainable Fund divides the countries into two main types: the first is the exporter countries and the second is the demographic dividend countries. He believes both can do well in the current climate.
He says: “A significant theme of the last six to nine months has been destocking inventories, which has been painful for the semiconductor supply chain. However, investors have started to anticipate the end of this cycle and that has supported economies such as Taiwan. Korean exports are also picking up.”
A number of the demographic dividend countries are benefiting from supply chain diversification – the ‘China plus one’ strategy employed by many companies. Countries such as India, Indonesia, Malaysia and Philippines are forecast to grow as much as 6% annually. Scholes says these bring a slightly different role to a diversified portfolio.
Sam Konrad, investment manager in the Jupiter Asian Equity Income team, says that Australia is often overlooked, but can be a useful source of dividends in the region and is experiencing strong economic growth: “It’s seeing a faster rate of population growth than India. Obviously, it’s a smaller base, but the government’s immigration policy has focused on the skilled or wealthy. Australia is forecast to see the fastest rate of economic growth among OECD countries. That translates to strong dividend growth. One of the beauties of the Asian region is there are developed markets, like Australia, alongside fast-growing emerging markets such as India.”
Asia has been every bit as invested in the growth of the artificial intelligence theme as the US, though more on the ‘picks and shovels’ side. Erskine-Murray says China is currently two or three years behind the US on AI, with growth held back by a lack of chips. Nevertheless, its large population means there will be a lot of data to feed into those models once the hardware comes through.
He adds: “The AI side is seeing some bottlenecks at the moment. Nevertheless, companies such as SK Hynix, which makes memory chips, are finding that demand is rapidly outstripping supply on the high end part of their businesses, which goes into AI servers. It’s a small proportion of the number they produce, but they have high margins.”
He also highlights the energy transition. Copper miners have been doing well, for example, and Baillie Gifford holds these in a number of its portfolios. Erskine Murray adds: “Likewise, the battery side has been doing well. Companies such as LG Chem have been doing very well, particularly from Western manufacturers. China has been very strong in electric vehicles. It is the largest exporter in the world and we have some exposure to the carmakers there.”
In general, Asia appears less fragile than many Western economies. The region was scarred by the Asian financial crisis and has stuck to orthodox monetary policy, rather than experimenting with quantitative easing or modern monetary theory. This has helped minimise inflationary pressures, which, in turn, has given its banks more flexibility. The lack of debt is likely to be an important factor in Asian strength looking forward.