2017 Asia Outlook: Constructive Recovery

In this video, co-CIO of Mirae Asset Global Investments (Hong Kong), Rahul Chadha, talks about Asia as an attractive location for equities given the current protectionist climate, the benefits of investing in a specific company rather than the firm’s entire industry, multi-year portfolio themes, as well as China’s role in the Fourth Industrial Revolution.

Trusts in Asia

Thanks to Real Estate Investment Trusts  ETF and Straits Trading, investors will be able to track REITS outside of Australia, Japan and New Zealand.  Therefore, investors will be able to get greater exposure to these REITS in Asia.  In addition, they’ll have another option on the Singapore Exchange.

This particular ETF is benchmarked to the FTSE Russell Epra/Nareit Asia ex-Japan Net Total Return REIT Index; which forms part the benchmark which is used for ETFs.  It has approximately US$10 billion (S$14 billion) in funds tracking it. The underlying portfolio of the ETF, according to Phillip Yeo, head of International Product at Nikko AM, is to deliver a gross yield of approximately 6 percent.  this is based on Bloomberg’s forward yield weighted average calculation for the 23 REITs. He further believes that the fund should be able to “deliver at least a 5 per cent yield fairly regularly, in line with Epra/Nareit Index’s historical range of 5 to 6 per cent.”

Meanwhile the status of REITs in Singapore is changing from when they used to be incredibly popular due to their reputation for high yields, property and steady income.  Now though, trust holders are not faring as well since the industry does not look all that good.  Even though indicated dividend yields remain untouched as return on assets dip.  Still, if the REITs can pay out the large dividends that the investors are hoping for, this is only because of leverage.

Ultimately though, Christopher Langner concluded: “The outcome may not be so bad, simply because there are stronger REITs and potential buyers of those very assets, in spite of their dwindling returns. It’s almost a rule of thumb among Singapore bankers that once a REIT’s shares trade below 70 percent of net asset value, it’s just a matter of time before a buyer comes in.”  It is that which investors have to hang on to.

Popularity of Asian Investment Trusts

Foreign investors who are seeking a strong investment region should look into Asian investment trusts according to some experts.  As the economies there mature, and the youth is indicating signs of good long-term prospects, the area is ripe for investments.

Despite the fact that in early 2016 Asian markets did it tough, things picked up during the rest of the year and the region encountered economic growth as well as company profits, both of which bolstered confidence in the Asian economy.   For people in the UK this fact has been particularly welcome. The Asia investment trusts delivered great returns, along with other overseas trusts, since when they converted back into pounds stirling, the returns are increased as the pound drops. As Head of Global Small Cap and Asia, Matthew Dobbs explained:

“Sterling returns have obviously been flattered by the weakness of the pound following the Brexit vote, but regional markets have made some progress thanks to the stabilisation of the Chinese economy, accommodative monetary conditions and modest expansion in economic activity. For 2017, we remain concerned that near-term stabilisation in Chinese economic conditions has been at the price of delayed economic restructuring and ultimately unsustainable credit growth. On a more positive note, global recovery would be helpful for the region, although subject to no material increase in trade barriers. With new leadership in Taiwan, the Philippines and, potentially, Korea, political developments will remain a focus.”

Furthermore, according to the Asian Development Bank’s recent report Asia’s $527 billion made it the top FDI destination in 2015.  And of the $1.76 trillion international FDI, almost a third went into Asia. The increase in Asia from 2014 was 9 percent.

Who is Investing in Asia?

Who is investing in Asia these days and why?  We look at a slew of investment opportunities in Asia and see which particular region is gaining popularity and what commodity.

First up, the largest (by revenue) airline in Japan, ANA, is looking into making more investments in other parts of Asia.  This is because it is trying to decrease its reliance on a slow-growing domestic market.

Numbers in Asia are looking good.  This year, the MSCI Asia ex-Japan Index returned a stable 5.3 percent. The JP Morgan Asia Credit Index measured Asian bonds at increasing 5.8 percent over the same time frame. In general, it seems that Asia is currently an attractive host for investments.  According to Chairman of the Singapore Economic Development Board, Beh Swan Gin, despite international uncertainties, Asia has kept up its perception of being a bright spark, thus attracting investment from all around the world.

Meanwhile, Singapore-based GIC has committed to investing $260.7 million in PT Nusantara Sejahtera Raya, a firm that runs the largest cinema chain in Indonesia.  this is indicative of the firm’s confidence in the long-term growth potential in the region.


Investing in Asia: Points to Consider

jobsFor those considering making an investment in Asia, there are many different options.  According to Nitin Bajaj, portfolio manager of the Fidelity Asian Values Investment Trust, “There are over 17,000 investible companies across Asia – which is a lot of companies to research.”  Therefore, when it comes to making an investment choice, he says that “what matters to me for generating long term returns is to buy good businesses, run by capable and trustworthy managers at reasonable prices, when they may have short term cyclical or internal issues.” He adds that he “often look[s] for companies which will be able to thrive in what today may seem like very unfashionable sectors. For instance, child care centres or manufacturing of plastic toys or producing packaging tubes for toothpastes may not seem particularly appealing. But it is in sectors like these that I have found companies that have built deep competitive advantages, are run by able managements, generate a lot of cash and are available at attractive prices.”

Then there is the perspective of potential Asian FDI investors worrying too much about the climate there.  According to UBS Wealth Management’s Asia-Pacific investment office’s leader Min Lan Tan, “Asian credits are showing few signs of stress, with spreads at 320 basis points versus the height of over 800 basis points during 2008 and 2009.”  Nonetheless, right now Asian equity markets are pretty much stagnant and valuations are getting to crisis levels.  It is probable that earnings forecasts will lessen, but even with this, there is prosperity in the mid-single digits along with robust ROE (Return on Equity) ratios.  In addition, it is likely that quality income stocks will encounter an improved performance this year, within an environment of a reduced pace of Fed rate hikes and renewed regional central bank focus on policy easing.

If Sir Richard Branson is to be heeded, then the current environment is ripe for investing in Asia.  His Virgin Active gym chain is putting £150m ($217.85m) into South East Asia, with the opening of around 30 gyms in the region.  Virgin Active’s CEO, Matthew Bucknall, explained:

“The success of our first four clubs in Thailand and Singapore has exceeded our expectations and the time is right to accelerate our expansion plans. The global health and fitness industry is evolving rapidly, with many of the current Asia health club offerings being outdated first-generation, fitness-only formats. Along with opening more of our large premium clubs, we are also looking at new formats.”

As well as this move being beneficial to Virgin, South East Asia’s economy will encounter a hike as with Virgin’s expansions around 2,000 jobs will be created within the next six years.

Asia’s Robot Revolution

robotRobots in Asia are becoming increasingly prevalent.  China and Japan seem to be the leaders in the robotic revolution, but the whole of Asia is being subject to these machinery assistant that are now to be seen in hospitals, retail stores, warehouses and more. Patent lawyers can attest to the substantial increase in filings for robotics technology, so much so that patent research firm IFI Claims have stated there has been a tripling of annual filings over the last 10 years.

Even though America leads the way vis-à-vis robotic software, China is ahead of the game in hardware manufacturing expertise.  It seems that robotics have become the country’s “national priority” and thus the race begins between east and west for which country will come out trumps in this new industry.

Just recently in Beijing, Americans and Europeans joined the Chinese in its Global Mobile Internet Conference.  It was predicted by the International Federation of Robotics that China will be subject to the most industrial robots working in factories by next year than any other country.  This is good for Asia as a whole, but it will be taking the place of Japan.  At an estimated $9.5 billion, China’s robot market is one of the largest in the world.

And that is just the beginning.  By 2020, China said if all goes according to plan, its production of industrial robots will be tripled, increasing production of approximately 33,000 annual units to 100,000.

It seems like a great place to make an investment.  Indeed, according to CB Insights, in 2015, VC investments more than doubled to a staggering $587 million. This includes private equity investors who want to build robot investment portfolios, and new incubators like Playground. Another reason it’s becoming an increasingly popular investment option is the price drop: over the last four years, there has been an average 14% price drop for industrial robots, all this while their capacities are increasing.


Who is Investing in Asia Today?

energyRussia used to be one of the big Asia FDI’s.  Over the last few years or so however, this has been changing. Various factors have contributed to the depletion of Russian finances entering into Asia.  One recent reason given was put forward by Kyrgyzstan President Almazbek Atambayev who at the end of last year pulled out of a Russian-Asian deal to construct two major hydropower facilities.  He explained as follows: “In the current situation, when the economy of Russia is not on the rise, let’s just say, and the trend for oil prices is only going downward, we see that these agreements… well, for objective reasons they cannot be fulfilled by the Russian side.”

This is not the only deal cancellation that has taken place in recent times.  It seems that there have been many disruptions to investments caused by Western sanctions against Russia.  One example was when work was suspended on the Caspian Sea’s Tsentralnoye offshore field since some of the technology needed for drilling was banned from sale to Russian companies.  One reason given was articulated by CEO of LUKoil, Vagit Alekperov who explained: “We cannot get the drilling equipment because it belongs to non-Russian companies. To build another drill rig just for one well would be illogical, so we and Gazprom have taken a pause, and we will wait until either other rigs free up, or sanctions are lifted.”

And then there was the highly publicized Russian withdrawal from Turkmenistan’s energy market in Central Asia. The highest-profile Russian retreat from Central Asia’s energy market is in Turkmenistan; that, in comparison to the celebrations marking the 2007 historic agreement between the two regions of the pipeline built that linked the two.

But it’s not all bleak for Asia.  In a more recent article in The Telegraph, it was explained how lucrative making an investment in Asian income funds can be for investors.  It comes with little risk and lots of growth opportunities.  As Jupiter’s Asian Income Fund Manager Jason Pidcock says: “They [these funds] offer diversity of income source and currency exposure and will aim to capture an exciting growth story in the medium to long term.”

And that’s before we even look at the technological investment opportunities Asia has to offer.  This can be seen via the $38million Tech in Asia Fund, which seeks to “serve the tech and startup ecosystem in Asia,” which it has been doing by “uncovering promising startups, reporting about news in the tech scene, and connecting people at our events.”

Yes, there have been some FDI withdrawal in Asia, but one only needs to look at McDonalds to see that Asia is still a powerhouse.  While there are currently over 2,800 McDonalds’ spanning China, South Korea and Hong Kong, that is just the start as the restaurant chain announced an additional 1,500 new eateries to make their presence in the region over the next five years.  Why?  CEO and President of McDonald’s, Steve Easterbrook said it was because: “Asia represents a significant area of opportunity for McDonald’s to blend our global quality standards with local insights and expertise from partners who share our vision and values.”


Video Games and SE Asia

video-gamesIt seems that when it comes to video games, South East Asia is where it’s happening. And it’s set to continue happening there too. Predictions for the next few years, garnered from Newzoo research firm, show that game revenues are set to grow by 50 percent per annum and by 2018 reach $485 million. Much of this is being facilitated by the new 4G mobile spectrum.

Even in 2015 there was an expansion of 86 percent. This is substantially higher than China, Japan and South Korea. The main place it’s happening is Thailand, which is, according to CEO and co-founder of Playlab, Jakob Lykkegaard, “becoming a key market for mobile games and studios.”

This could be partly in due to the fact that research has shown Thais to be spending an average of 5.7 hours per day on their smartphones.

It could also be the case that Indonesia will follow suit and soon after because the Number one South East Asian region for gaming due to factors like continually expanding middle class, increase in mobile web penetration and its already considerable population.

Furthermore, a recent announcement will very soon make it possible for Indonesia to have a strategic plan that will shape its entire digital game industry in an effort to give local developers more of a controlling share of the market. An action plan is being developed to facilitate the country’s goal of having local players in the gaming industry control at least half of the market by 2020. Currently, they only have control of 20 percent of the $321 million generated by the gaming industry and there is a threat that the figure will further plummet to 3 percent in the next three years if the government does not collaborate with local industry stakeholders.

China’s Economic Growth

railwaysThroughout 2015, China encountered a deceleration in its economic growth. However, even with this, it still boosted its investment in railways last year. $126 billion was spent on rail projects throughout 2015, resulting in 9,000 kilometers of new track into operation. Thus today, there are 19,000 kilometers of high speed rail in China. According to the China Railways Corporation these figures matched the annual targets.

So while fixed asset investment accelerated 10.2% year over year (down from 13.9% at the beginning of the year), railway construction projects – in comparison – really encountered a significant expansion. It is hoped that this year, China’s GDP will grow 6.5 percent, down from the 6.9% figure of 2015’s last quarter.

In an effort to enhance the growth of the nation, it has been suggested that focus should move away from the “export-led model” and toward “more sustainable, domestic consumption-led growth.” According to head of China/Hong Kong Strategy for Hong Kong-based brokerage CLSA, Francis Cheung, “China will go from a high growth rate to slower or more sustainable growth rate. It at least will take two to three years for the economy to be on the stable growth path. Unfortunately, that’s not good for the market. There will still be a volatile market in 2016.”

Power in Asia

singaporeIt has long been known that Asia is a real powerhouse. In addition, it is home to seven out of the top 10 fastest growing economies. In addition, in a recent ranking undertaken by Business Insider, 15 out of the 50 most powerful people in the world were Asian-based. The ranking went according to: economic power, newsworthiness, impact etc., and how much recognition they have in their industries.

Furthermore, women are thriving in Asia. At Singtel for example – the huge telecom company in the region – a third of senior management roles are held by women. This includes: Group CEO and head of Investment, Operations and Technology.   In Singapore the success of women in the workplace is especially existent. Over the past ten years, according to the World Economic Forum, there has been an escalation of 15% of women in the workforce. As well, women comprise 15% of CEOs in Singapore (which is the highest in Asia, and the third highest in the world). Although, that does mean that 85% of CEOs are men…

In Japan it seems that companies are trying to gear up to women’s rights and gender equality in the workplace.   Just recently the country’s Ministry of Trade and Industry – together with the Tokyo Stock Exchange – chose Nissan as the “Nadeshiko Brand firm,” the company that “promotes the use of the female workforce.” The nadeshiko is a pink flower (carnation) that grows in Japan and is often associated with the beauty and grace of Japanese women.

However before we get too excited about Japan, we might want to remember that “its GDP just contracted for the second quarter in a row, which, yes is the rule of thumb we use to define a recession.” But that’s not the only way we measure a region’s success. When it comes to technology, according to Michael Sekora, an ex-top U.S. Defense Agency executive, “What matters ultimately is technology. Japan has continued to perform superlatively on that measure. America’s performance has been disastrous.”