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Asia Growth Equity Fund 2022 Outlook

Regulatory Policies Cast Shadow Over Growth-Style Stocks in Asia

In the face of multiple headwinds last year, sentiment towards Asian economies waned. An unexpected rollout of stringent policies against certain growth industries in China, including big internet platforms, brought challenges as China sought to rebalance its economy, casting a shadow over the outlook for other Asian economies. The property sector—a pillar of economic growth—slowed as the Chinese government pushed a stringent deleveraging campaign in the wake of the Evergrande fallout. But by the end of the year, the government had started to loosen these policies.

While we still consider China to be a main growth engine across the region, we also hold a constructive view of growth-type stocks in Asia, which we’d expect to trade at more attractive valuations in 2022 after the corrections we saw last year.

Macroeconomic Challenges from US Interest Rate Hikes Should Be Manageable

The US Federal Reserve (Fed) announced in December last year that it would raise interest rates in 2022 to curb inflation, raising market concerns over the potential impact on Asian economies. However, against the last tightening we saw in 2018, the potential impact will be different this time—the current inflation phenomenon is largely driven by the US from our observations.

The Fed has implemented unprecedented fiscal and monetary loosening policies since the COVID-19 pandemic. While the US has made significant efforts to boost its economy, we consider it to be overstretched. In contrast, these inflationary pressures aren’t found in Asia because it didn’t follow the same path, partially due to the manufacturing and supply chain leaders that emerged in countries such as South Korea, Vietnam and Taiwan.

Currency is largely determined by the following three factors: i.) current account balance, ii.) real interest rate differential and iii.) capital flows. As the Fed seeks to unwind the policies from the global pandemic, interest rates and therefore the US dollar is set to rise while other currencies may depreciate against it. That said, Asian economies are not homogenous and are also unlikely to react in the same way as they did after the Fed raised interest rates in 2015.

Some economies may want to pivot away from a sharp currency depreciation by raising interest rates too, as higher interest rates tend to dampen domestic investment and consumption. That said, we think it the potential macroeconomic impact from the three-to-four interest-rate hikes in 2022 should be largely manageable for most Asian economies. Within this group, we’ve seen some bright spots emerge as we head into the new year.

Clean Sweep for Carbon-Neutral Technology

The United Nations Climate Change Conference (COP26) held in November 2021 reinforced a strong global consensus for the need to reduce carbon emissions. Even when we strip away the political context, the clean technology industry is supported by a strong economic value because its production costs—including solar modules, wind-generated power or electric vehicles (EVs)—are already competitive against its incumbents such as coal-powered plants or traditional internal combustion engine (ICE) vehicles. These advancements have all been made possible on the back of favourable monetary support from government policies. Overall, we believe the clean energy industry is a major big growth sector in 2022, as the global push for net zero will intensify over the course of the year.

For solar, installations fell below expectations in 2021 due to a few factors. The cost of key materials rose on the back of increased demand, increasing the cost of polysilicon by over 100%.1That said, we don’t think polysilicon capacity issues will run into 2022 as supply chain pressures should ease up. Looking ahead, we see some growth opportunities within the solar industry. According to estimations by the International Energy Agency (IEA), annual solar installations will increase fourfold between 2020 and 2030 to achieve its net-zero goal by 2050.2 Fundamentally, the cost of producing solar energy is now cheaper than coal, and is a key factor which could continue to propel clean energy technology to the forefront of investors’ minds.

There are some concerns that an eventual oversupply in the solar supply chain, or rising competition will lead to lower margins for the general industry. However, we think these up-and-coming competitors are not industry competitors, but those companies involved in thermal coal that are attempting to pivot into solar. As long as the cost of solar remains cheaper than the cost of producing coal, a potential oversupply should bring in value into the solar supply chain. An oversupply in solar-generated energy should likely accelerate the general transition to clean energy. As a result, we are particularly interested in every section of the solar supply chain—each with its own potential opportunities.

Electric Vehicle Industry Maintains Momentum

Electric vehicle (EV) and battery stocks in China experienced a market correction over December and January due to a strong rotation from growth to value type stocks, related to concerns over the prospect of interest rate hikes in 2022. However, we believe that the EV and battery industry has just entered the S-curve acceleration stage that will last for the next three to four years, just like we witnessed with smartphone penetration in the early 2010s. Therefore we are willing to look more positively on EV and battery stocks when this correction occurs.

We believe that the conditions for EV adoption is ripe. First, pure battery EV manufacturing costs are already lower than that of traditional internal combustion engine (ICE) vehicles, due to massive reductions in the cost of lithium-iron-phosphate (LFP) battery technology. The cost of a battery pack at US$100 per kWh has reached an inflection point and has overtaken ICE manufacturing costs.3 Chinese battery makers such as BYD and CATL had already reached that sweet spot in 2020. Since then, most EV models have already boasted cost advantages, irrespective of subsidies and fuel efficiency gains. Secondly, the rising popularity of autonomous functions have also accelerated original equipment manufacturers’ (OEMs’) transition to EVs. OEM manufacturers have had to advance automated driving technologies which include robust light detection and ranging (LiDAR) systems to scan and measure distances, along with producing the chips required for automated driving systems.

In 2021, China’s new energy vehicle (NEV) sales topped 3.1 million units, with further expectations the figure will grow to more than 4.5 million year on year, implying a growth rate of 45%.4 Taking reference from Norway, where EV penetration has increased 10% almost every year over the last 5-6 years, we also expect the same thing to occur in China and Europe over the coming years.5 It is largely expected that companies such as Tesla and XPeng will become beneficiaries of this growth, given both companies’ market share.

China has ramped up its efforts to incentivize its domestic semiconductor industry, encouraging semiconductor players to build out a supply chain that includes a combination of fabless, foundry and integrated device manufacturing companies. We maintain a constructive view on this sector and expect secular and structural elements to continue to support growth.

India’s Opportunities Broaden

India has begun to show glimmers of hope as it emerges from the global pandemic. Yet as India eased pandemic-related restrictions towards the end of 2021, a new variant came to light. That said, we’ve observed constructive and long-term economic development from India—it has become the second-largest weighted country in the fund.

Indian IT service companies that offer cloud migration, data analytics and support for remote working are becoming increasingly popular as global firms fight for contracts with these Indian service providers. The rising demand is a boon to India’s economy, as the IT sector—which boasts a 4 million headcount6—is core to India’s emerging middle-class population.

Strong income growth among this group are likely to pull India out of a decade-long downward cycle of property and corporate investment, as more citizens are willing to buy new-build properties, with tax income from these transactions expected to support the government’s initiatives to develop more infrastructure projects.

India also is likely to undergo a massive power investment boom in the coming years. A fall in the cost of solar panels along with India’s dry and sunny climate, is fertile ground for solar power generation. The cost of solar power generation in India is already 40% cheaper than that of coal, and is a positive development for clean energy.7 Better profitability with clean energy projects and increasing investments in clean technology is likely to continue across India. The government has already started to implement plans to increase its renewable energy capacity to 450 GWh by 2030, up from the current 100 GWh capacity now.8 Prominent companies within this space such as Reliance, Tata and Adani Group have also announced similar plans.

In our view, India has found a solution around its chronic energy trade deficit that impacted its manufacturing sector, which is less competitive due to a vulnerable and somewhat costly power supply. On the back of these plans, lower energy prices would support a more positive outlook for India’s manufacturing sector.

New Age Digital Emerging in ASEAN and India

An area we recognize as one of the fast-growing growth sectors in the coming years are the internet business models emerging from the Association of Southeast Asian Nations (ASEAN) and India. Internet businesses have taken off in the West and have already reached a saturation point. In comparison, internet platforms in emerging Asian countries are only just starting to take off, due to the advent of fourth-generation (4G) wireless infrastructure. These countries have historically had good quality fixed-line networks, building out more established 4G networks should encourage new opportunities for investors.

For example, a former game developer that’s now a leading e-commerce platform within ASEAN, Sea Limited, has leveraged its gaming business experience to create an interactive experience for its users and has emerged as a leading online shopping platform. Given the early stages of e-commerce in most ASEAN countries, the company has significant headroom for growth. Elsewhere, companies like Zomato, a leading food delivery app in India that recently listed in July, has entered the market at the same time as the rollout of a reliable 4G network. We’d expect to see more internet businesses leverage this development in the coming years.


Many factors from the previous year that once spooked investors are considered far behind us. We’d consider the upcoming impact from the US interest rate hikes to be manageable for most Asian economies. The advent of reliable 4G networks is particularly encouraging for internet businesses, some of which are emulating the success stories we’ve seen earlier in western economies. We’ll be watching these developments closely in as we head into 2022.

Phil S. LEE
Head of AP Research

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1. Source: Macquarie, 2021.

2. Source: International Energy Agency, May 2021.

3. Source: SNE Research, Nomura, 2021.

4. Source: CAAM, Macquarie, 2022.

5. Source: Norwegian Road Federation, 2021.

6. Source: Jefferies, 2021.

7. Source: JP Morgan, 2021.

8. Source: The Economic Times, 2021.

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