Asia ex Japan equities are set to benefit from the second wave of the “flying geese” economic model, according to global asset manager PineBridge Investments.
In its most recent whitepaper: Why it’s Time Time to Flock to Asian Equities, PineBridge Investments explains that as developing markets move up the value-chain, long-term investment themes across the region are emerging, including increasing demand for premium goods and services in sectors including healthcare, media, tourism and telecommunications.
Wilfred Son Keng Po, Portfolio Manager, Asia ex Japan Equities at PineBridge Investments, says: “The dynamic we’re now seeing is that ambitious and well-managed companies in Asia are being buoyed by progressive population trends, increased wealth, better education and social welfare, and supportive government policies for innovation and entrepreneurship. We believe this new trend offers equity investors significant potential in the years to come.”
In its original incarnation, the “flying geese” economic model saw a cascade of technology transfer from Japan to the “Asian tigers”: Hong Kong, Singapore, South Korea, and Taiwan. But PineBridge explains that a second iteration is now in operation that includes China, Southeast Asia and India.
“Both China and India are vast markets that are becoming manufacturing and innovation power houses, supported by Asean nations. These Southeast Asian economies provide both the natural resources and value-added manufacturing products and services to drive domestic demand as well as to boost manufacturing sectors for exports,” adds Elizabeth Soon, Portfolio Manager, Asia ex Japan Equities at PineBridge Investments.
“We believe that while economic growth in Asia is impacted by US interest rates, commodity prices, and the pace of structural reforms, the progression of developing economies along the value-chain will continue be the main driver for powerful, long-running investment themes across several industries, despite the economic headwinds.”
These investment themes include:
- Domestic demand will continue to expand, helping the consumer retail sector, especially in China where the government is re-directing the country’s economic growth from an investment and export platform to one based on household consumption.
- Southeast Asia’s expanding middle class will also provide a strong market for branded consumer goods. This rapidly growing demographic segment is spending money on mobile phones, internet access, and online shopping. Some of the fastest growing sectors have been in technology, media, both outbound and inbound tourism and telecommunications.
- Meanwhile, aging populations in countries such as Singapore, Taiwan and South Korea mean that health care – including hospitals, pharmaceuticals, and technology will be another opportunity for investors.
PineBridge says that for investors in Asia ex Japan equities to succeed, sectoral trends such as domestic consumption should be considered a main driver of growth but not looked at in isolation. Detailed analysis of company performance, management, balance sheets and potential, is needed as broad-brush investment style choices such as size, growth, value, and momentum are unlikely to be rewarded due to continued market volatility.
“Investors can use the volatility caused by macro factors to look for durable and high-quality companies within consumer sectors that are both driving the region’s growth and supplying demand for premium products and services across the flock of flying geese,” adds Mr. Son Keng Po.