The macro picture of Asia is one of the most positive that can be seen globally. A region led by China, which was the only great power that grew in 2020 and which this year could repeat on the podium with estimated growth of 8%. A potential that will drag the rest of the Asian region. Since Fidelity, Domingo Barroso points out two factors that are positive for the region. “One is the weak dollar, which will continue to accompany us and also, if we look at the earnings growth data of the companies we speak of growth rates of + 20% not only in China but also in Korea, Singapore or the Southeast Asian region” .
All this supported by demography, which is a strategic and structural factor, and consumption. One of the factors that China has wanted to develop through the fourteenth Five-Year Plan – a roadmap that will mark the future of the country until 2025 and whose final version will be approved this March – is the deployment of the country’s internal consumption. A plan that makes it clear that “it is not about growing to grow but about trying to have a more sustainable growth and make the most of the population volume,” he says. Bruno Patain, Country Head Eurizon AM.
Because if there is something behind all this, it is that China wants to be independent from everything. Proof of this is that at the end of November 2020, the largest free trade agreement in the world was signed between 15 countries in the Asia Pacific region, the RCEP (Regional Comprehensive Economic Association). An agreement that represents a blow over the geopolitical board as it brings together 15 countries “that represent more than 2,200 million inhabitants, 30% of world GDP but the most relevant thing is that China has turned around the negotiations with the US to create a free trade zone trying to reduce 92% of tariffs ”; says Barroso, which positions China as a geopolitical leader.
Good news to continue developing the Chinese model that “can be considered an island in the sense that before the Chinese economy was very dependent on the outside, both for its value chain and exports and, increasingly, creates a market and it is laying the foundations for internal consumption (1,400 million people) to be the engine of such continuous growth ”, he assures Pablo Moreno, from Aberdeen Standard Investment.
The war with the US for technological supremacy will continue … although with common criteria in sustainability
A potential that the US is trying to curb at all costs. Trump imposed tariffs and restrictions on the trade of Chinese products while Biden, although anticipated as a more likely candidate for negotiations, still maintains the tariffs anticipating that the long-term technological war and the current supply chain will drag on in time causing the new normal is that masked tension of a technological war.
A war that is strategic – defensive where “the US is trying to protect itself from a new giant. While it is true that we can talk about the fact that they will continue to compete, we believe that on the other hand they will collaborate on certain things – on the subject of sustainability they are talking for Cop 26 – so on the one hand clear competition for markets and technology but with common criteria, how is sustainability ”; Patain says.
“China has shown in different sectors of innovation and technology that they are leaders and that they are beating the US. In data management, AI, 5G they are winning the race but especially because of the Chinese system, which is a managed capitalism ”. From Aberdeen they emphasize that in the part of the value chain sectors such as semiconductors or industries more linked to the “going green”, China has taken an important lead. “The country is around 90% of the production of the solar energy value chain, it is a leader in the production of electric batteries, a leader in the manufacture of wind turbine turbines … Perhaps this dependence on abroad will not be so strong in the coming years. and in fact his model goes there ”.
And it will be this technological leadership that will make the country’s largest investments focus on infrastructures that allow the country to be a leader in next-generation technologies. From Eurizon they estimate that “by 2025 China will have become a high-tech superpower with a goal that more than 80% of Chinese companies are connected with ultra-broadband. The country has the largest robotics market in the world and Artificial Intelligence will represent 150,000 million dollars in the next decade ”. The region knows that “innovation comes from different routes that affect the industrial, sustainable and consumer side. Without forgetting that there are almost 1,000 million users acting on the internet, through mobile phones, shopping…. with which the technology will go to very broad sectors of the lifestyle, from health, how they consume leisure and education. Innovation is transversal and will cover different sectors to make a country more sustainable, efficient, productive and greener ”.
And it is that although Asia is clear that the way to continue growing is by investing in this type of infrastructure, traditional infrastructures cannot be obvious. More knowing that currently 7 of the 10 largest cities in the world are Asian “with which they will have to continue investing in expansion works for ports, railways, airports as well as schools, colleges, hospitals…. And also investments in infrastructures from the value chain that will promote the growth of suppliers of materials – cements, industrial gases – going through industrial processes – to make electric motors – and also the chain of network operators ”, admits Moreno.
Sustainable plans focused on climate change
A region where the urbanization rate is 60% – compared to 80% in developed countries – and it is clear that if it wants to increase its consumption, it has to continue increasing the urbanization rate, continuing to bring people from the lower class to the middle class and from the countryside to the cities because it is the way to create wealth and consumption. And this has a counterpart: pollution. “China knows that its growth model is generating a lot of waste and I believe that its sustainability policy – based on the promise of being“ Net0 ”of Carbon in 2060 – will be focused on waste management and on making its growth and cities more sustainable. . The country talks about the three Rs, reduce (consumption), reuse and recycle ”, admits the Fidelity expert.
Measures that will have implications for government plans and companies themselves, increasingly scrutinized by institutional investors. The sector believes that once it achieves its environmental objectives, “it will focus on improving the corporate governance of companies. For Aberdeen it is essential and we believe that the issue of engagement is important for that and it is easier if you have a physical presence there. Visiting the companies and having fluent communication is very necessary because they will be asked to open the books and in fact they are very proactive in that regard ”. Finally, the social issue will have to be taken into account “in these countries where there were controversial issues and it will continue to be monitored. If ESG is key in any area of the world, it is in this area and that will make the flows ever greater and that requirement is demanded to try to find a better world, ”says Moreno.
A change of course that will close the gap that currently exists between the market and the economy. China is the second largest economy and second largest stock market in the world, with a capitalization of more than 10 trillion dollars. And yet Class A shares only represent 0.6% of the MSCI All Countries World Index. At the equity index level “China has a very small weight and only for technical reasons there will be more flows in its financial assets because these companies that innovate and have the support of the government (semiconductors, 5G, renewable energies, electric vehicles, discretionary consumption and even private health) not only have potential but there will be more and more, which will attract greater flows ”, says Patain. Something that is already being seen.
China is clear that it has to open its capital market, “it is doing it by connecting its onshre – off shore exchanges, trying to capture more flow of foreign investors (they are only 10% of its capital market) and it has to take more steps to give more protection to investors and transparency ”, says Barroso. From Aberdeen Standard Investment they recognize that “in the heat of the reduction of the shares of the conect stock (that investors from abroad invest in the local market) several positive things are being achieved: reducing the volatility and the casino concept of Class A shares (more institutional profile and less retail), in addition flows are growing because it is a market where active management adds value as it is a difficult and unknown market ”.
A market that has been favored by the obligation of the Chinese investor to participate in the local market, which supports “both equities and fixed income. But China knows that this cannot be maintained forever and that it has to allow its investors to invest in whatever assets they want. Therefore, this implies flows that will leave the country and for that it is necessary to have flows that enter, that is why it is making efforts from the stock connect and other platforms that allow a greater entry of international flows ”, argues the Eurizon expert.
And in fact, one of the pillars of the investment case in China is the promotion of government policies so that the Chinese start thinking about setting up their own pension funds, which in turn will result in higher flows of both fixed income and income. variable income.
Currently, almost 50% of the wealth of Chinese households is in real estate compared to 10% in equity. “The margin to grow is very strong. In addition, the government does not want to continue creating bubbles in some assets and real estate is one of those that worries them so it has to begin to transfer the wealth of households so that they move from investing in real estate to more liquid assets. And that together with the creation of a pension plan makes us very optimistic about this market ”.
In addition, there is the currency. The renminbi is barely present (2%) on world exchanges and there are many reasons to think that it will gain more and more space. First for a matter of pride, says Patain, but mainly because the central banks of Germany or France are buying this currency as a reserve currency. If Europe wants to get out of this situation as Japan did “with a challenge in pensions and an aging population, one option is to sell euros and invest in assets with yield, emerging or China. Only this fact will support the currency. You can even mention the policies of the BoJ, ECB or FED printing money at levels never seen before, something that China is not doing, and only for that reason in the coming years its currencies will lose strength while the renminbi will not. “
In addition, if they want to remain as a reference currency at a global level, maintain the attraction of capital and that their international markets look serious “we have already seen declarations committing that there cannot be great volatility in the currency. And the reality is that if we compare it with other emerging countries, it is probably one of the ones that has had the least volatility in recent years, ”says Moreno.
Three headlines about the future of the economic giant
Pablo Moreno (Aberdeen SI): “Asia Pacific is coming of age. There is much talk of emerging markets by valuations but now they already have good growth with a cleaner macro and probably, being selective, with a micro with better balance sheets, income statements and growth prospects than the developed ones ”
Bruno Patain (Eurizon): “A new sun. We are used to having the US leading both the emerging and developed world. China is increasingly leading the emerging market and a new sun is appearing in our economic universe ”.
Domingo Barroso (Fidelity): “The new paradigm is made by China based on three pillars: consumption, sustainability and innovation. That is the new growth paradigm that China will lead and that many economies will follow ”.