Why invest in Asia?
Understanding the real opportunities
Asia is still significantly under-represented in both equity and bond portfolios and benchmarks. But it shouldn’t be! Why?
Asian assets are attractively valued relative to developed markets – the MSCI AC Asia Pacific Price/Earnings ratio (PE) is nearly 24 versus 30 for the MSCI World as at March 31, 2021.
In our opinion, future profitability will be driven by innovation, consumption, and the rise of the RMB as the region’s powerhouse currency.
Technology is benefiting from huge investment, with China having bridged the gap with the US in terms of R&D spending – unthinkable ten years ago.
8%
in 2021, compared to 3.9% for advanced economies
Asia’s GDP growth is expected to rebound by
The region has dealt with the pandemic better than the West.
SECTION 3 & 4 GRAPHS
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Source: Refinitiv Datastream, Pictet Asset Management.
Asia’s own wealth is growing:
the region is no longer simply the producer of goods for the western consumer, its own booming middle class is fuelling strong domestic consumption.
Asia: Future
engine of growth
50%
of global growth by 2045.
We believe Asian growth will continue to significantly outperform the rest of the world. Emerging Asia is expected to be more than
China and India will represent 45% of the global middle class by 2030
And because incomes are rising from lower levels, this growing wealth is resulting in less precautionary saving and a higher propensity to consume.
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In terms of GDP per capita China is 3x less wealthy than the US
Rise of the RMB: China’s growth, coupled with intra-regional trading is creating an RMB-based economic zone that accounts for around 25% of global GDP, and this will likely grow as the US current account deficit leads to growing de-dollarization.
ESG: China is already a global leader in terms of renewable energy: it produces more than 70% of all photovoltaic panels, half of the world’s electric vehicles, and a third of it’s wind power. The sector will be boosted by the government’s intention of reaching carbon neutrality by 2060.
Source: Financial Times, 4 February 2021.
Some of the most interesting opportunities are elsewhere in the region
1. China
China’s sheer scale and growth prospects make it an essential part of portfolios.
Aside from Mainland China there are three key areas when it comes to Asian investing.
1. Taiwan & Korea
Taiwan and Korea, more developed markets (GDP per capita equivalent to Italy/Spain) and advanced semi-conductor sector.
2. India
India is the other regional giant set to benefit: significant changes from austerity-driven budget to growth/infrastructure spending.
3. Still-emerging Asia
The Philippines, Thailand, Indonesia and Vietnam.
Did you know?
Did you know?
Relatively low volatility with diversification benefits
The Asia bond market has rapidly expanded in recent years and is often under-represented in investors’ portfolios. It offers many opportunities for investors to increase yields and diversify existing holdings.
China is now the second largest bond market in the world and offers attractive investment opportunities in both the government bond and corporate sectors.
Chinese bonds offer 3% yields (government and corporate bonds): attractive relative to minimal yields elsewhere and a source of diversification, in a currency that could strengthen further.
It’s not just about equities
It is not just about Mainland China
opportunities
Total R&D spending (PPP*): China and US
Source: Refinitiv Datastream, Pictet Asset Management. As of November 2020. *Purchasing power parity (PPP) is a formula used to compare different countries' currencies through the price of specific goods which are valued equal.
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Total return forecasts in USD, p.a. over the next 5 years
Source: Bloomberg indices for commodities, Burgiss index for private equity, HFRI for hedge funds, NCREIF/SXI/Europe & UK closed ended funds for real estate markets, ICE Bullion for gold. 17th March 2021.
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5Y TOTAL RETURNS IN LOCAL CURRENCY, P.A CURRENCY IMPACT
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China’s 10Y bond spread vs US Treasuries and inflation differential
Source: Refinitiv Datastream, Pictet Asset Management. Pictet AM estimated % deviation from equilibrium rate vs. USD, based on relative prices, relative productivities & net foreign assets . 17th March 2021. Consumer Price Index (CPI) measures the average change in prices over time that consumers pay for a basket of goods and services. An economic indicator used to measure inflation and, by proxy, the effectiveness of the government's economic policy.
Government bond USD return volatility and average correlation*
Source: Refinitiv, Pictet Asset Management. As of 17th March 2021. * Volatility and correlations are based on 10Y local government bond USD weekly return over last 10Y. Annualised volatility from 16 March 2011 to 17 March 2021. * Correlation measures the degree to which two securities move in relation to each other.
And in the event of mishaps, the Chinese central bank still has scope for stimulus.
Asia is emerging from the pandemic ahead of the west
It offers earnings growth in a secular low growth global environment, and equity valuations appear reasonable
Fixed income offers yield and diversification
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Indian growth is being powered by structural drivers
Demographics: The demographic dividend has passed from China to India, with India now in the sweet spot where;
• Overall population growth is slowing allowing for better per capita outcomes
• Yet dependency ratios remain favourable and are likely to remain as such for the next ~30 years, according to our analysis.
Industrialisation: the installed power capacity base has increased significantly over time – correlated to the increased industrialisation and urbanisation of the economy.
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Source: U.S. Energy Information Administration, based on information published by EIA and International Energy Agency 2018.
The most under the radar segment is the still-emerging Asia
The Philippines, Thailand, Indonesia Vietnam- which are benefitting from intra-regional supply chain growth, as mainland China moves up the value chain. (for example: Vietnam’s value-added manufacturing share of its export up from c3% in 2010 to 30% now!).
Vietnam saw an increase in GDP during the pandemic (3%), the only country with constant growth during the year 2020. Indonesia has gone through a lot of reforms since Joko Widodo took the lead, it has also won regional agreements recently, and has a lot of potential for growth in sectors such as microfinance.
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(South) Asian demographic tailwind: dependency ratio* to continue falling out to 2040 in India, rise only marginally in ASEAN but to rise sharply presenting a challenge to China.
Urbanisation provides a structural driver of productivity gains that should continue to benefit the likes of India, Indonesia, the Philippines and Vietnam. China has urbanised beyond the sweet spot consistent with peak per capita GDP gains.
Greater financial inclusion, formalisation of economies (higher tax base) and female participation in labour force can all boost productivity further in India and the ASEAN region.
China 10Y government bond yield - US 10Y China CPI YoY% - US CPI YoY%
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Average correlation with the other 10 bonds
Annualised Volatility
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This document is issued by Pictet Asset Management SA. The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments. Copyright 2021 Pictet – issued in April 2021
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India's net electricity generation by fuel type
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Why now?
Why investors can no longer ignore Asia
Did you know?
High tech markets
Driven by government support, a vast potential market and increasing R&D spending, South Korea and Taiwan are now the two largest semiconductor players in Asia Pacific. The region is the world's biggest market for semiconductors, accounting for 60% of global semiconductor sales.
Source: Deloitte, 2020.
United States 47%
Semiconductor revenue by country (Top 6)
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South Korea 19%
Japan 5%
Taiwan
(Province of China) 6%
China 5%
The Netherlands 4%
Asia is emerging from the pandemic ahead of the west
Fixed income offers yield and diversification
It offers earnings growth in a secular low growth global environment, and equity valuations appear reasonable
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%
Source: Oxford economics forecasts, Refinitiv Datastream, Pictet Asset Management. As of November 2020.
Source: The unprecedented expansion of the global middle class – The Brookings Institution, January 2020.
Source: data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD. 31.01.2021
Source: Refinitiv, Pictet Asset Management, December 2020.
Source: 1. Pictet Asset Management, December 2020. 2. Pictet Group, February 2021.
*Dependency ratio, the ratio of old to working age population.
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