The Asia Pacific region continues to provide plenty of attractive growth and income opportunities. But against a backdrop of higher inflation, greater government interference and growing environmental risks, an active approach is key, explains Jason Pidcock, Head of Strategy, Asian Income.

 

• Inflation likely to remain elevated; many central banks are looking to tighten monetary policy, while governments are imposing tax hikes
• Against this backdrop, companies’ pricing power and balance sheet strength are especially important
• Investors must be aware of the risks – from company-specific risks to environmental risks and government interference
• Asia Pacific equities continue to offer attractive growth and income opportunities, but an active approach is key

 

Many Asia Pacific stock markets, and indeed stock markets globally, delivered strong returns in 2021, as economic activity resumed and investors switched their focus to a post-Covid world. As a result, it’s fair to say that some pockets of the Asia Pacific stock market are now looking quite expensive as we near the end of 2021. Nevertheless, I still believe the region presents many attractively valued growth – and income – opportunities for investors, as long as you’re selective.

Sticky, not transitory, inflation

I expect inflation to remain elevated for some time – it will likely be higher than it’s been for a couple of decades, and I think it will remain so throughout 2022. Many central banks are considering, or have already begun, tightening monetary policy; meanwhile, many governments are looking to impose tax hikes to help cover the costs of propping up economies that have been hit hard by Covid disruption. Real growth rates have been strong in 2021, given they were coming from such a low base, but I expect next year’s growth rates to be lower than this year’s.

Being selective is key

Higher inflation means not only a squeeze on consumers’ pockets, but also on businesses – indeed, we are already starting to see the effects coming through this year.

 

I therefore believe it’s more important than ever to identify companies with pricing power and sales resilience, along with strong balance sheets. As inflation rises, businesses must increase prices to avoid their margins being squeezed, so we need to focus on those companies that can do so while not reducing demand. If interest rates are hiked and credit costs pick up, strong balance sheets are also very important; companies with low debt levels will be able to cope best in this environment.

 

On a sector level, this is why I prefer the consumer staples sector. Price increases mean the average consumer will be forced to spend a greater proportion of their income on necessities, leaving less for discretionary items. I also continue to favour the technology sector. Taiwan, in particular, is home to some of the world’s most successful and exciting technology companies. Some of these businesses are highly innovative due to heavy spending on research and development, and several names in the sector can offer significant growth opportunities while also paying attractive dividend yields. Elsewhere, Australia is home to many excellent financial services companies, as well as offering numerous large natural resources companies, along with many industrial and infrastructure businesses which are arguably world class.

Asia for income & growth

Avoiding the riskier areas of the market

I believe that Asia Pacific remains an attractive place for both growth and income investment opportunities. Identifying companies that are willing, as well as able, to pay dividends remains a crucial element of my investment process. I expect to see growth in dividends from Asia Pacific companies next year, partly due to this year’s earnings growth, as well as likely continued earnings growth next year. Real interest rates are likely to remain low in many countries around the world for some time yet, adding to the appeal of equity income strategies.

 

In my view, the best approach to investing in such a vast universe is a combination of top-down country-level views and bottom-up fundamental stock-picking, while remaining mindful of the risks associated with any investment decisions.

Asia for income

I believe that Asia Pacific remains an attractive place for both growth and income investment opportunities. Identifying companies that are willing, as well as able, to pay dividends remains a crucial element of my investment process. I expect to see growth in dividends from Asia Pacific companies next year, partly due to this year’s earnings growth, as well as likely continued earnings growth next year. Real interest rates are likely to remain low in many countries around the world for some time yet, adding to the appeal of equity income strategies.

 

In my view, the best approach to investing in such a vast universe is a combination of top-down country-level views and bottom-up fundamental stock-picking, while remaining mindful of the risks associated with any investment decisions.

The value of active minds: independent thinking