Can Asia deliver post-pandemic investment promise?

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While Asian GDP growth in a post-pandemic world presents attractive potential for global investors, identifying opportunity and harvesting returns from the region can pose significant challenges, says Walter Scott¹ co-head of investment research Alan Edington

As China and other Asian economies make good progress in their return to normality after the challenges of the Covid-19 coronavirus, investors’ attention is drawn to the many opportunities within the region as the pandemic crisis recedes.

Alan Edington, co-head of investment research at Walter Scott, believes that by taking a global perspective, it is possible to find high-quality companies in spite of the crisis.

Commenting on underlying strengths in the region, Edington says: “Asian markets tend to be cheaper than their US counterparts and GDP in Asia consistently grows faster than in many other markets around the world, including the US. This means it should harbour faster growing companies, which should grow earnings quicker than others, resulting in greater returns for shareholders.

Edington believes a detailed knowledge of companies working within Asia – or outside the region with compelling Asian exposure to their businesses – is key.

Successful exposure to Asian market can be achieved through very specific means. It’s sometimes important to ignore the wider market and focus on companies and make sure you choose those companies carefully, be they based in Asia or widely exposed to the market by other means,” he says.

Companies that benefit from growth in Asia, which we believe have the quality to compete on the global stage in terms of growth, profitability and governance, are the investments we look for.  We target businesses that have exposure to certain parts of the economy and niches that have a tailwind behind them as this means they should take a growing share of GDP in growing regions over time.

For all this, Edington also emphasises the importance of knowing the companies investors select and maintaining a detailed understanding of their underlying exposures.

From a wider investment standpoint, Edington believes that, while the longer-term aftermath of Covid-19 could present a range of challenges to businesses in the Asia region, some of the gloomiest predictions about its disruptive power may be overstated.

Some commentators have predicted the pandemic will result in a complete overhaul for supply chains, to avoid any over-reliance on any one region, yet not everyone shares this view. A good example is one of the world’s biggest cosmetic manufacturers who told us there would be no changes to its business model,” he says.

Depending on the nature of a business, all sorts of factors can determine how it is impacted and its ability to recover from the knock-on effects of the pandemic. While it looks likely the rise in online sales we have seen recently will endure many other factors remain uncertain.

At a country level, Edington is seeing clear signs of a pickup in China’s economic activity, yet he remains wary of comparing likely recovery patterns in other countries with this vast market.

China was the first country to enter the pandemic crisis. It locked down hard and broadly. Now it’s the first out and is rapidly getting back to business as usual. While things are normalising in China, we don’t think you can extrapolate that to the rest of the world or indeed any other specific market. Lockdown has varied on a country-by-country basis and wider industry exposures to countries will also vary widely.

While Covid-19 has dominated headlines in China this year, ongoing unrest in Hong Kong also remains firmly on the agenda. While Walter Scott is keeping a watching brief on the market Edington believes that, for now, the city continues to hold significant investment potential.

While we are concerned by the situation in Hong Kong and see that the new security law does restrict civil liberties and limits the independence of the judiciary, we do still think the market is investible.

When making investment decisions, we always weigh up a business’s growth prospects, profitability, balance sheet strength, the sustainability of its business model and its valuation to see whether we believe it offers the right opportunity or not. Today, based on these judgements, we retain our existing exposures within the Hong Kong market,” he adds.

¹Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.

Disclosure: The value of investments can fall. Investors may not get back the amount invested.

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