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Asia Sector Leader Equity Fund: 2021 Review and Outlook
Similar to the rest of the world, Asian capital markets continued to experience volatility in 2021 due to the ongoing COVID-19 pandemic. Relative to Western developed markets, most Asian countries’ vaccination programs lagged, leaving their populations more exposed at the height of the Delta-variant outbreak. Mobility restrictions impacted production, leading to various shortages along the supply chain and contributing to the global inflation trend. However, we remain constructive on the Asian economic recovery and outlook in 2022.
Potential tailwinds and headwinds going into 2022
While investors have been worried about Fed tapering and rate hikes, an overlooked tailwind in Asia is China’s monetary policy which is now shifting to easing. Outside of China, we believe that Asian policymakers are moving deliberately slowly in a bid to kick start the investment cycle and boost nominal GDP growth. Compared to the ‘taper tantrum’ of 2013, we don’t expect US Fed tapering to negatively impact emerging market (EM) economies as severely, given real yield differentials of most EMs versus the US are much higher now than back in 2013.
The development of the new COVID-19 variant, Omicron, led to a correction in global equities which also clouded the Asian market. However, the new variant is proving to be a lot less lethal than what was initially envisaged and booster shots have been shown to reduce the severity of symptoms and hospitalization rates. Vaccination rates across Asia have also picked up significantly over the past 6 months, providing governments with confidence to keep their economies open and support broader reopening across Asia. By 1Q22, majority of Asian countries are expected to have at least 80% of their population fully vaccinated.1
What is likely to continue to weigh on the market next year is the extent and pace of the Fed’s tapering and monetary hikes. The main risk here is that central banks overtighten or withdraw support too early due to inflation scare while longer-term deflationary forces remain. The ongoing COVID-19 pandemic and the potential for new variants will also continue to cause uncertainty for investors, despite initial positive indicators as mentioned above. As such, we expect the next 6 months to be extremely volatile, but that also provides investors with an opportunity to add exposure on dips at attractive valuations.
In 2021, we saw the adverse side effects of regulatory crackdowns in China outweigh the positive benefits to sectors where there was government endorsement. “Common prosperity” is now widely regarded as the key policy motivation behind the unprecedented regulatory changes that came down on internet and gaming companies, after-school education, and the real estate sector. However, we believe China has now passed its heaviest phase of deleveraging and tightening.
As we move into 2022, we expect to see China move towards monetary easing as authorities focus on stabilizing the economy and promoting greater social equality and welfare. Recent soundbites from China are supportive of this, as leadership have indicated their worries about growth. From a market perspective, we believe this is positive as China has always followed a countercyclical policy to most developed markets. Valuations in China remain attractive at current levels, providing opportunities to add exposure especially within policy-favoured sectors.
Despite undergoing one of the most severe COVID-19 outbreak seen globally, Indian equities delivered some of the strongest returns in the region in 2021. Daily new COVID-19 cases have continued to trend down from peaks of around 400,000 in May to less than 9,000 in December.2 By early 2022, we expect vaccination rates in India to reach critical mass and recovery to gather further strength at this time.
India’s structural growth story has really started to play out over the past year and, thus, it remains a key overweight for the Asia Sector Leader Equity Fund (the Fund). Despite its valuation premium compared to other emerging markets (EMs), India is still in the early stages of an economic upcycle with significant headroom for growth over the coming years. The government has also introduced initiatives such as the production linked incentive (PLI) scheme to kickstart the investment cycle and create new jobs. Foreign direct investment (FDI) inflows to India have grown at 16% CAGR over the last 20 years and continued to attract record levels even during the pandemic.3
Northeast Asian region, including South Korea and Taiwan, made earlier progress in controlling the COVID-19 outbreak, thus allowing various industries within the region to resume operations just ahead of the global surge in demand. In Korea, valuations remain attractive, nearing its 10-year historic average levels. The Korean market has been stagnant over the last quarter due to concerns over global growth peaking. However, an important point which has often been missed is the work that Korean companies have been doing to develop stronger quality factors, including improving corporate governance and shareholder wealth creation. Within Korea, we see opportunities in multiple sectors, including the semiconductor industry, auto industry, and electric vehicle (EV) battery makers. Unlike Korea, our exposure to Taiwan is a lot more selective. Valuations in Taiwan are relatively more expensive, however, there are some select plays which offer favourable risk/reward profiles – mainly in the semiconductor chain.
The Fund maintains an off-index play in Vietnam, as well as exposure to Indonesia, Singapore, and Malaysia. Overall, Southeast Asian countries lagged in containing the Delta-variant outbreak, leading to a halt in growth across the region. Vietnam, for example, saw its labour-force participation rate fall to a 10-year low while the unemployment rates reach 10-year highs due to COVID-19 restrictions in the third quarter.4 Vaccination programs were initially slow to roll out within ASEAN countries. However, vaccination rates have since expanded to be on par with other Asian countries, allowing policymakers to focus on reopening their economies.
Moving into 2022, we are optimistic about the rebound of ASEAN countries as 1) reopening should promote a recovery in domestic demand, 2) reopening will allow workers to return to work, lifting production levels and, subsequently, help alleviate supply-side constraints. On the whole, the region is under-owned and has not exhibited any significant misallocation of capital over the last number of years. Coupled with the structural growth opportunities in sectors such as internet platforms, consumer discretionary, and retail banking, we remain constructive on the region for the year ahead.
Themes and sector bets
The Fund’s most prominent and high conviction bets are in its exposure to the consumer discretionary sector, which makes up almost 30% of the Fund and is a significant overweight. We’re bullish on the sector as there are numerous nuanced stories across the Asia Pacific region on companies catering to the changing tastes and aspirations of the evolving consumer landscape. We believe these stories are at the cusp of a significant growth trajectory and includes the likes of a leading jewellery retailer in Vietnam, the food delivery story in India, as well as other services platform providers listed in China. Outside of consumer discretionary, consumer finance and health care are also favoured sectors, especially across India and parts of ASEAN. Health care is an off-benchmark exposure which provides ongoing stability to the Fund. We’ve also observed that, post-COVID, health care is likely to be a main priority for most governments across the region.
From a thematic perspective, one of the biggest events this year was the UN Climate Change Conference in Glasgow (COP26), which placed a spotlight on renewable energy. Currently, close to 10-15% of the Fund is invested in either a direct or ancillary play within the renewable energy space, including the likes of polysilicon companies and companies within the wind ancillary chain. We’re also starting to see a boom in EVs thanks to cheaper production and improving cost competitiveness. Here, we’re looking not just at EV car manufacturers, but also EV battery suppliers which Asia is dominating in. For the remaining 80-85% of the portfolio, we continue to engage with companies on their plans to reduce their carbon footprint as they grow each year.
Transition to SFDR Article 8 Fund
Over the last 12-18 months, we’ve been preparing the Asia Sector Leader Equity Fund for the historical shift towards being an SFDR Article 8 fund. From a portfolio perspective, the change in the portfolio in preparation for this shift has been minimal, with less than 5% overall change. Mirae Asset has had a proprietary ESG scorecard since 2015, which we’ve recently enhanced to introduce elements such as sector-specificity and weighted scoring. We monitor our financed emissions whereby portfolio carbon footprints are monitored on a monthly basis and portfolio managers work to better that of the benchmark. On net zero targets, whilst we regularly assess the necessity and feasibility of setting net zero targets, our current view is to invest in low carbon transition and not only rely solely on divestment. We believe investing in companies that are decarbonising their business, facilitated by active engagement from us as investors, contributes most to a low carbon transition particularly in urbanising emerging markets. The transition process towards being an SFDR Article 8 fund is nearing its final stages and we look forward to sharing the official announcement once finalized in 2022.
Staying Ahead with Mirae Asset’s Latest Insights
1. Morgan Stanley, November 2021
2. Our World in Data, December 2021
3. Government of India, June 2021
4. JP Morgan, October 2021
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