What does Biden’s win mean for Asia?
With the US set to welcome a new president, this could open the door for opportunities in Asian markets
The change of US president does not signal an end to trade wars and global tensions, but it is also creating opportunities for investors in Asia, according to James Thom, manager of Aberdeen New Dawn Investment Trust.
‘We expect a Biden presidency to be, at the very least, more predictable in its dealings with China. Biden has already talked about going through the World Trade Organisation, which indicates he will be more multi-lateral than Trump was in his approach,’ Thom said.
‘But it’s important to remember that the underlying pressures remain. There is considerable bi-partisan support in the US for the idea of containing China’s rise, and we don’t see that going away,’ he noted.
While trade tariffs might not ratchet up further, those already in place could well remain, according to Thom. ‘The US trade deficit continues to widen, and at the same time, there are also issues around national security. While we may not see the same shotgun-style approach we came to expect under Trump, the broad thrust seems likely to remain the same,’ he said.
But the unintended consequence of these trade tensions has been to push China into greater self-reliance. Over the last 15 years, the economy has gone from being predominantly export- and infrastructure-spending driven, to being fuelled by domestic consumption and the services sector. This process has been further accelerated by tensions with the US, Thom said.
‘One example would be the semi-conductor space, where we are definitely seeing a drive by China to achieve self-sufficiency after China’s biggest chipmaker SMIC came under significant pressure from the US,’ he notes.
This process is leading to a twin global standard, particularly in tech, with a western model and an Asian or Chinese-led model. ‘This might not be optimal, but from an investment standpoint it creates opportunities because there will be substantial growth within China on the back of this push for self-reliance,’ he said.
This is very much an area of focus for the team working on Aberdeen New Dawn Investment Trust. ‘We have very little direct exposure to China semi-conductors, but we hold a very sizeable position in TSMC (Taiwan Semiconductor Manufacturing Company), so are able to look across the value chain and find where the opportunities are,’ Thom said.
While tech is the most obvious area affected by China’s taking back of market share into the domestic arena, others are also benefiting.
Hong Kong is king
The Hong Kong stock exchange, a sizeable position within Aberdeen New Dawn, has been a standout performer for the Trust. ‘It has for some time been a play on the ongoing liberalisation of China’s capital markets, but more recently it has also been a beneficiary of geopolitical tensions between the US and China. The pressure that the US has been placing on Chinese companies listed on US exchanges has prompted many either to de-list entirely from US exchanges – or to seek secondary listings back in Asia – and the HK exchange has been the go-to destination for this. As a result, it has seen a flood of new IPOs from these types of companies over the course of 2020,’ Thom said.
The consumer duty free segment – long dominated by South Korean operators – is also seeing considerable change. ‘We’ve seen huge growth in spending on duty-free cosmetics and so forth by Chinese consumers, and there’s now a significant relaxation of regulation around the sector in China. My sense is that the aim is to try to bring that spending back home. One particular beneficiary is Hainan, the island off China, a major duty-free hub, and that has helped one of our holdings, the A-share listed China Tourism Group Duty Free Corp,’ Thom notes.
While growth is the obvious catalyst in this area, the key criteria for Aberdeen New Dawn Investment Trust are always whether individual businesses have the quality to be able to sustain consistent growth. ‘When we look through the value chain, we always focus on margins and bargaining power. Ideally, we want to find a duopoly or an oligopoly type of structure, where the dynamics are healthy and returns are attractive,’ he said.
With Asia’s markets continuing to attract foreign capital and getting more used to the demands of foreign investors, several new quality stocks are emerging, while companies within China are also improving governance structures. ‘If we can’t find companies that meet our quality criteria, it doesn’t matter how great the top-down story is, we won’t put capital to work there. But over the last three years, we’ve seen considerable progress on that front, and that has allowed us to put more and more capital to work in China,’ he said.
Thom also points out that while Covid infections are still rising in some parts of Asia, and there is always the risk of another wave of infections, governments there appear to be having success in bringing these new outbreaks under control- while in the West, the situation is more uncertain. ‘With much of Europe still in lockdown and the US looking as if it might go that way soon, Asia could now be over the worst. Even in the Asian markets where case numbers are still rising – India, Indonesia, Hong Kong and the Philippines – it looks as though they might have peaked. For China, Korea, Taiwan, Singapore and much of South East Asia, as well as Australia and New Zealand, the pandemic appears to have been brought under control,’ he said.
The approach of Asian governments has been different to the rest of the world and is now paying dividends, as economic activity starts to rebound. ‘If you look at consensus estimates for growth this year, China is set to grow by around 1% -2%, which is not a lot, but it is still quite remarkable under the circumstances. Taiwan is also expected to grow, while Korea will be down by perhaps 1% or 2% year on year. That compares favourably to the UK, where GDP numbers are likely to be grim by the end of the year,’ he said.
This should mean, barring a major second wave in the region, that corporate earnings next year are predicted to be solid. ‘Consensus forecasts are expected to rebound by as much as 25% year-on-year,’ Thom said.
The Aberdeen New Dawn approach looks deeply into the whys and hows of investment opportunity, often well beyond headlines and fashionable sectors and businesses. At its core, resilient businesses with strong management and differentiation tend to be those that make the grade for inclusion in the Trust’s portfolio.
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