Markets

8 stocks poised to profit from 6 game-changing themes

Thu 06 Jul 23, 9:45am (AEST)
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Source: Livewire Markets

Key Points

  • The MSCI Asia ex-Japan Index has actually gone nowhere over the last 12 months due to a number of factors, including rising interest rates, the ongoing trade war between the US and China, and concerns about the global economy
  • Investors should focus on companies with strong fundamentals and attractive valuations
  • There are 6 key investment themes to watch in Asia, including aspiration and rising affluence, infrastructure and urbanisation, digitalisation, going green, health and wellness, and tech enablers

The reopening of China, expected rate cuts in South Korea and Indonesia, and the growth engine developing in India should have all been indicators for why Asian equities could have outperformed its Western rivals. Instead, the MSCI Asia ex-Japan Index has actually gone nowhere over the last 12 months and is well off its 52-week high. 

But for investors that are willing to do the research, Christina Woon, investment director for Asian equities at abrdn, argues there are plenty of opportunities.

"I think the key thing going forward is to be able to choose companies properly, choose markets that have structurally growing tailwinds and that's going to help you weather the cycle a lot better," she said.

In this interview, Woon presented her case for why the time to take a punt on Asian equities. She also shared six key investment themes that investors should be paying more attention to - matching a stock with each one. 

Primary Image Crop (1600 × 595 mm) (1600 × 595 px) (3)
Christina Woon, abrdn

The changing macro environment 

Asia is home to some of the world's most interesting macro narratives. China is cutting interest rates but at a time when there is no inflation and consumer confidence is at recessionary levels. Japan's reopening from COVID lockdowns, ultra-loose monetary policy, and a mentality shift in favour of enhancing corporate value have all created the perfect ingredients for its recent rally. In contrast, foreign investors are rushing into Indian equities as that country's central bank could be one of the first to cut interest rates.

And while that's putting the region firmly in the spotlight, Woon reminds me (and you) that Asia is by no means like its Western counterparts

"They [Asian central banks] were later to their rate hiking cycles. It's been less severe across most of Asia. In Australia, it's been a bit harsher than what we've seen across the rest of the continent," she said. 

"The way we try to navigate this is that, if you think rates are going to go up, you want to invest in companies that have either stronger bargaining power, the ability to pass through high input costs through high interest rate, or they've got stronger balance sheets so their interest costs aren't too much of an issue," she added.

And while Aussie investors love their materials and cyclical plays, Woon is a little less convinced.

"Many of the sectors that we typically know, as cyclicals like commodities might not do as well as you'd expect even if rates to come off," she said. "I think you've got to be extra selective and in this current environment," Woon added.

Fundamentals are back in vogue

One estimate from DWS suggests corporate earnings growth in Asia could be "two-digit" by 2024. To make sure Woon and her team find these outstanding companies, they have a multi-layered quality filter. 

"For us, that's ensuring that you've got a company which plays into a structurally growing industry or a structurally growing market. One that has strong financials which I think if you can imagine in the current environment of either higher interest rates or more pressures on demand or supply, that's something that will hold out a bit better," she said. 

And while these might be 'conventional' traits of a quality company, she also highlights the importance of site visits and management interviews as extra parts of the abrdn team's investment methodology.

"Are these people that you can trust to be good stewards of capital?," Woon questioned. "I think for us being able to engage with companies, speaking to them and getting a sense of how they are thinking longer term, gives you a bit more comfort in holding on to the investment," she added.

Valuations are back in vogue

Woon argued it's become easier to pick stocks in this environment as the bias moves away from factor and style-dependency towards individual selection.

"I think it's actually been a bit better this year being able to really sift through what's going on because that level that playing ground has levelled out a little. Extremely cheap stocks have become more expensive and the more expensive stocks, which tend to be the quality growth ones, have come off in valuations as well," she said.

So how does the abrdn team find a quality investment at a price worth paying?

"We don't want to just pay anything for it," Woon said. "The way we would look at that would be by sector of course. So depending on the sector or depending on the company itself we might apply different valuation metrics, either DCF (discounted cash flows) or our relative valuation. We will look at how valuations stack up relative to history as well," she added.

Six key investment themes (and a stock or two for each)

#1 Aspiration and rising affluence is creating an opportunity for premium consumption brands and insurance companies as Asia's middle class grows larger and the demand for quality products continue to grow.

Woon's top plays in this space are Indian life insurance provider SBI Life (NSE: SBILIFE) and Asia's largest life insurance provider AIA Group (HKG: 1299) as both companies are at the forefront of these demographic tailwinds.

#2 Infrastructure and urbanisation are creating opportunities for property developers as well as the "picks and shovels" companies which contribute to this thematic. Woon and her team have had to be picky given the legacy of the Evergrande collapse though.

Woon's top play in this space is Indian concrete and cement-manufacturer UltraTech Cement (NSE: ULTRACEMCO).

#3 The increasing digitalisation of Asia is putting the spotlight on fintech, tech services, and integration companies that bring the power of the information highway into industries that wouldn't otherwise have exposure. One such company, Chinese-listed Glodon (SHE: 002410), is looking to bring the benefits of digitalisation to the construction industry.

#4 Going green is a natural tailwind for companies exposed to the electric vehicle and battery technology thematic.

Asia has many of those companies including Korean-listed LG Chem (KRX: 051910) and Chinese-listed CATL (SHE: 300750), both of which Woon and her team are invested in.

#5 The Asian consumer's greater spend on health and wellness has opened up a whole world of potential investment ideas. From hospital operators to big pharmaceutical companies, Woon says consumers are demanding more from their healthcare.

Two companies which the abrdn team are invested in include Shenzhen-listed Aier Eye Hospital (SHE: 300015) and the biotech child of the Samsung Group, Samsung Biologics (KRX: 207940).

#6 Tech enablers are creating opportunities for the world's most populous continent and its supply chains. Woon is backing companies that invest in big data and digital inter-connectivity like giants TSMC (TPE: 2330) and Samsung (KRX: 005930).

As Woon’s remit also covers Japan, she said Japan last year was arguably the starkest factor rotation in Asia which saw valuations of many quality stocks come off beyond their fundamentals, and that’s recovered this year with a more supportive outlook.

This article was first published for Livewire Markets on Thursday, 6 June 2023.

Written By

Hans Lee

Content Editor

Hans is a Content Editor at Livewire Markets and Market Index. He created Signal or Noise and helps write the LW-MI Morning Wrap on Tuesdays and Thursdays.

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