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Asian equities outlook 2022

The future is online, and sustainable
01 December 2021
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    Key takeaways:

    • In 2021, Asian and emerging market equity markets have seen the highest dispersion of returns in a decade. This has created a fertile playing field for active managers who are searching for alpha
    • In 2022, we believe this dispersion theme will continue to be dominant from an earnings growth perspective. We focus on companies with strong and sustainable business models, capable of withstanding swings in industry cycles. Market dislocations caused by swings in sentiment around new Covid waves, regulatory changes, expectations of higher inflation and interest rates, amongst other factors, create the opportunity to add to our core conviction holdings
    • We continue to favour technology and innovation enablers and have positions in semiconductor leaders whose products and designs are indispensable in all walks of life
    • We will continue to focus on the thematic appeal of Indian and ASEAN digital economies, which have added value to our strategies in 2021, and have the scope to add more value in 2022 and beyond
    • ESG has long been integrated into our investment process. For example, carbon intensity of our Asia equity core strategy is close to 70 per cent below that of its benchmark. Weekly bottom-up company deep dives and monthly top down debates are conducted by the Asian team to create a platform for active engagements with our holdings. As active owners we seek to drive positive change for companies we own, which should ultimately lead to an enhancement of returns for our Asian portfolios

    A look back at 2021 and outlook for Asian equities in 2022

    Asian equities had a tough year in 2021 driven by slowdown in mainland China, unexpected regulatory changes, ongoing COVID-19 shocks, policy tightening, and inflation overhang. What is interesting is that 2021 has also seen the highest return dispersion within Asian and Emerging Market (EM) countries/regions over the past 10 years (chart below). To put this in context, MSCI Asia ex Japan is down 2.2 per cent year-to-date (as of October) – but in delving deeper into country/region performance, India is up 29.0 per cent and Taiwan is up 17.7 per cent, while mainland China is down by 14.0 per cent, making it the worst performing market in Asia. This dispersion has created value for us as active managers to generate alpha by focusing on bottom up opportunities for our investors. In our view volatility = opportunity for active managers, especially those with a contrarian streak and discipline.

    Our investment discipline resulted in the full exit of a mainland Chinese online discount retailer we had held in our Asia equity core strategy since 2017. The company’s share price rose sharply earlier in 2021 (5x higher than our initial purchases) despite no change in fundamentals but with numerous sell side upgrades. When the share price hit our bull target price, we decided to exit in full given the unfavourable risk return relationship. This company is amongst our biggest stock contributors on a year-to-date basis, and the share price has subsequently collapsed. We could call ourselves a bit lucky to have avoided the collapse as we were not aware of the extent of the Chinese regulatory headwinds that would hit internet platform companies, but this also shows the importance of being disciplined in our investment approach amidst market events. From a broader perspective, we had cut back on our mainland China exposure ahead of the regulatory headlines earlier in 2021 given elevated valuation and deployed the funds into Indian and ASEAN new economy companies, which also helped our Asian equity core strategy’s performance year-to-date.

    From a macro perspective, mainland China might see a cyclical slowdown as the country led the way into the expansion phase of the economic cycle post Covid, but regulatory headwinds as well as a property sector slowdown have begun to counter this. However, as we go into 2022, we believe Beijing will likely adopt a more gradual approach to regulatory tightening that limits systemic macro risks. On the other hand, India and ASEAN will potentially extend their gains in 2022 as the regions move towards Covid vaccination rates that are more closely aligned with other parts of the world; this should translate into better GDP growth and above-average earnings gains. From an earnings growth perspective, we believe the dispersion theme will continue to be dominant. We focus on secular leaders and structural opportunities that can deliver across industry cycles in our high conviction portfolios. Our portfolios are dominated by companies that have net cash balance sheets owing to strong and leading business models. Such positioning has helped our portfolios weather the swings of the last two years and should help us manage the surprises that 2022 might bring.

    2021 has the highest return dispersion within EM countries/regions over the last 10 years

    The chart shows the difference in cumulative returns between top and bottom 20 per cent percentile of EM country/regions on a given year. A wider area means that the return dispersion between best and worst performing markets is highest

    Source: HSBC Asset Management, Bloomberg, MSCI, data as of November 2021

    Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. The views expressed above were held at the time of preparation; are subject to change without notice.

    What themes and sectors do you favour in Asia whilst still learning to live with the pandemic?

    The pandemic has intensified the digital transformation of businesses and pushed consumers online. At the same time, the concept of metaverse is one that could have some investment implications, as it would allow a bigger overlap between our digital and physical lives, be it in entertainment, shopping or socialization. We favour the technology and innovation enablers, and our portfolios hold positions in semiconductor leaders whose products and designs are indispensable in all walks of life.

    Increasing wealth in Asia and the resulting changing consumption patterns remain another focus for us. To play on the theme of rising disposable income in mainland China, for instance, we have invested into a Hong Kong listed global beauty and personal care company, where mainland China has become its largest market. The company has enhanced its platform offering by making a couple of brand acquisitions, which is creating operating leverage. In line with the global trend of increasing online usage, the company delivered a 33 per cent year-on-year rise in its most recent annual online sales – a segment which also benefits from higher margins than offline sales.

    In India, we have seen new economy unicorns coming to public markets in 2021. We believe that India is entering a period of the rise of the internet ecosystem, similar to what we have seen in the Chinese internet space over the past decade or so. We remain focused on India’s strong thematic appeal and growth potential of new economy sectors in terms of bottom up opportunities. An example of a recent company we invested in is an Indian beauty and personal care e-commerce platform company which went public in 2021. The company has a long runway of growth visibility driven by affordable data, rapid digital adoption, and evolution of the logistics and payment ecosystem in India.

    Additionally, online entertainment is another trend that has also accelerated from the pandemic, and one which we believe will be here to stay. We have invested in Asian online gaming leaders who are increasingly expanding their addressable market geographically – a move which would also allow them to mitigate regulatory risks in the mainland Chinese internet sector. Leading internet pioneers in Southeast Asia have expanded beyond their borders, establishing their footprint in Latin America and beyond, by leveraging their social commerce and mobile first strategies. More recently, they have also been testing the waters in various European countries, in an attempt to capture some of the EUR 757 billion e-commerce market.

    Our investment edge lies in our ability to understand both the company dynamics and competitive positioning within the secular themes, including the path to profitability, the market opportunity and the upside to current valuations to generate long term alpha for our investors.

    Source: IDC, DART, HSBC Asset Management, data as of November 2021

    Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. The views expressed above were held at the time of preparation; are subject to change without notice.

    How has the increased focus on sustainable investing impacted your investment strategies?

    In our Asian equity portfolios, ESG has long been integrated as part of our investment process, as ESG issues can impact not only long term performance of a company but also broader stakeholders within a company’s ecosystem. The increased focus on sustainable investing has resulted in more resources and expertise within HSBC Asset Management, including in our Responsible Investing team.

    The Asian team has regular meetings to ensure that our analysts and fund managers are able to understand and incorporate ESG and non-financial elements into the assessment of a company. Weekly bottom-up company deep dives and monthly top down debates are conducted by the Asian team to create a platform for active engagements with our holdings.

    One of the crucial elements within ESG is active ownership and engagement – we use this to support and ensure that companies are managed in line with the long term interests of their investors. A practical example which shows our active ownership is around a portfolio holding of an Indian media and entertainment company, which has a good business model and was very attractively valued while having issues around governance and disclosures. The board of the company had recommended an usually high pay rise for its chief executive but took a pay freeze for its staff. As a result, a call was taken by us to vote against the reappointment of two directors of the company – one in the remuneration and another in the audit committee – who have subsequently resigned prior to the annual general meeting. Following the leadership reshuffle, the top shareholder had called for an extraordinary general meeting to revamp the board, including the removal of the chief executive. This is an example where we as active owners strive for positive change in the companies we hold, which has ultimately led to an enhancement in returns for the portfolio.

    Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only. The views expressed above were held at the time of preparation; are subject to change without notice.

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