Technology and digitisation boost for Asian companies into and beyond 2021
Jorry Rask Nøddekær
Lead Fund Manager, Emerging Markets & Asia Team
Making short-term forecasts is difficult – as 2020 shows – and we would stress that the key focus for our strategy and portfolio into 2021 and beyond is the companies we invest in. We look for those that will navigate the big structural swings as well as the smaller cyclical swings. In a year’s time, it is highly likely that I will write that we did not get the top-down macro spot on, but we did have some good companies in the portfolio that worked for us.
The macroeconomic environment does look conducive for growth and a positive spillover into equity markets. We are close to a Goldilocks scenario for many Asian economies as almost every single country in Asia has been running below their potential growth rate and now, with the combination of strong stimuli from fiscal and monetary policies and a coronavirus vaccine in sight, we expect a real economic recovery to play out during 2021. Clearly some of this is already priced in by the market. Therefore, we hope to see a period of above-trend growth in these economies with no real inflationary pressures as there will be slack in a lot of areas, particularly in the old economies.
We also see a good argument for a weak dollar. For us, the key here is not only fiscal and monetary policy, but also the weak savings rate in the US. This could work as a good tailwind for the Asian markets.
Besides this more cyclical trend, that is linked both with the recovery in many domestic economies and with a boost to many export-driven economies, we also expect the digitalisation trend to have a profound influence on 2021 – and for many years to come. For many Asian economies, there will be a boost for domestic development as companies, and society as a whole, are forced to jump on the digital bandwagon. We expect many of the key technology companies in north Asia (Korea, Taiwan, and China) to have a strong year, again. Put simply, the COVID-19 pandemic encouraged rush orders for screens, new routers, laptops and so on, with people buying the last inventory of old technology.
5G will be a profound evolution that will open up new opportunities in ways of living and being entertained, as well as moving into industrial sectors.The world learned how important and urgent core technology can be. We have all made structural changes to our way of living and working, and now we are at the forefront of a new technology upgrade cycle with 5G, WiFi 6, and gadget cycles for the likes of Apple and Samsung Electronics. 5G will be a profound evolution that will open up new opportunities in ways of living and being entertained, as well as moving into industrial sectors. We will soon start to see the implications of high-performance computers and so on.
Besides the cyclical recovery, we expect to see a strong structural technology and digitalisation trend playing out as we continue to find attractive investment opportunities and mispricing here. This will be a key focus for us in 2021.
There are four structural trends beyond digital transformation that will continue to play out in 2021 and evolve in the years to come:
Urbanisation trends in the old-style emerging market economies, such as India and Vietnam, with the development of a digitalised service-related economy.
Healthcare services are needed and being demanded by consumers/patients, and need a huge technology upgrade to go digital if they are ever going to work.
We increasingly live in a multipolar world and, even with a change in the White House, this trend will continue, which means a number of Asian countries will have to make adjustments and re-invent themselves for the new decade. We expect some countries, such as Vietnam, to massively benefit.
ESG trends and climate change implications will continue to take centre stage globally. This will again create opportunities for those companies and countries that can adapt though at the same time it will also catch some countries and many companies short on their mindset and readiness.
In our view, these structural trends – and the underlying companies – will play a greater role than the cyclical trends enjoying their time in the sun right now. They have the potential to continue their joyride into 2021, but in the end fundamentals will prevail.
The elephant in the room is the unbelievably high level of debt we are faced with, particularly in Western economies. Debt was extremely high before the crisis but has now ballooned to something that years back was unthinkable. We think there is a reasonable likelihood that during 2021 the market will swing back and look at debt sustainability levels, that will swing policy away from fiscal spending towards central banks doing all the heavy lifting. This could result in value experiencing some multiplier contraction and move the focus back to quality growth as the fear of high inflation and rising rates will move to the background again. Asia could be seen as a safe haven as a result.
Structurally, we see a disinflationary environment going forwards, acknowledging that we could see a small inflation jump as economies open up during the summer (assuming the vaccine is successful). The three Ds of demographics, debt and digitalisation will quickly overpower any cyclical recovery on the back of a successful vaccine. The global economy just before COVID-19 was not particularly good and it is hard to see things being better immediately afterwards – all structural trends have just been re-enforced and moved forwards.
This gives us significant exposures and focus in our portfolio where we believe the stocks we can identify within these growth areas will have a favourable combination of growth and valuation relative to the given risk levels.
We see favourable opportunities in:
technology, driven by 5G and the semiconductor evolution where Asia has great companies at attractive valuations.
healthcare, where we see opportunities in broad healthcare sectors areas, particularly in the digitalisation of healthcare, and medtech thanks to its localisation.
internet services as they move into the service economy.
electric vehicles (EVs) globally hitting the inflection point for EV adoption as we are at the forefront of a significant evolution in mobility and energy systems around mobility.
Vietnam is evolving fast with strong drivers around FDI (foreign direct investment), trade and urbanisation which creates interesting investment opportunities in areas such as the consumer, property and financials.
India, where we see a cyclical recovery as well as it having what you might call its ‘smartphone moment’.
This is far from a complete list but should highlight where we find many interesting investment opportunities in Asia.
Jorry joined Polar Capital in June 2018 to set up the Polar Capital emerging markets growth franchise in July 2018.
Prior to joining Polar Capital, Jorry worked at various firms including Nordea Investment Management, Danske Capital, F&C Investment Management, New Star Asset Management and BankInvest Asset Management.