Joanna Kwok and Mark Davids, portfolio managers of the JPMorgan Funds - Asia Growth Fund, look at the market changes and structural shifts that make Asia a compelling hunting ground for investors in search of growth.
1. A generation of transformation
Asia's share of the MSCI AC World Index has surged over the past 20 years from 5% in 1999 to 16% as at the end of December 2018, with both outperformance and equity issuance driving the increase.
Over the same period, Asia's share of revenues rose from 4% to 30%, and its share of net profits rose from 3% to 33%.1 This means that not only have Asian revenues and earnings grown more rapidly than those of the rest of the world, and Asian margins expanded (as illustrated by the differential between earnings and revenue growth), but Asia has actually derated vs. the rest of the world, given that its share of market cap has not kept pace.
Our belief is that, over the next generation, opportunities for investors will be driven by yet more transformational earnings growth, and also by valuations that more fully reflect the positive change.
2. An evolving opportunity set
As the investable universe has grown, its composition has also changed significantly, with Asia's growing role as a technology leader reshaping its markets. Sectors such as utilities and financials have receded in importance, while sectors such as consumer discretionary (internet retailers plus companies capitalising on a shift to higher-value products), communication services (media and software, as well as telecoms) and information technology have come to the fore.
At the country level the change is even starker, with Hong Kong and Singapore declining as a percentage of the whole, while India's share has grown and China has become the largest component of the index.
As Asia's city states have ceded importance to markets such as India and China, which are less wealthy but much larger, the opportunity set has not just shifted but has expanded. We expect this trend to continue.
Asia's growing relevance on the world stage
Source: J.P.Morgan Asset Management, data as of Sep 1999 and Dec 2018. Data based on index breakdown of MSCI AC World, all in USD. Past performance is not a reliable indicator of current and future results.
3. Structural change
Asia's growing middle class of increasingly wealthy consumers is driving changes that, over time, are independent of market cycles. The financial sector is benefiting from increasing penetration of mortgages, insurance and investment products, while the ageing population of wealthier households is spending more on healthcare, as well as on quality education for children and grandchildren.
In the consumer space, growing affluence is resulting in "premiumisation", or the shift to higher-quality goods and services. In Vietnam and China, for example, dairy companies are expanding by offering premium products to consumers with growing purchasing power.
Meanwhile, local companies are key players in the technological shifts that are happening in Asia and beyond - fast-moving innovation in areas such as networking, electric and autonomous vehicles, alternative intelligence, and factory automation.
4. The A-share revolution
While China's economic transformation has been one of the defining stories of the 21st century so far, its economic success has not always been reflected in its equity markets. This has served as a reminder that equity investors buy companies, not economies.
The first Chinese companies to list overseas were state-owned enterprises that did not always prioritise the interests of their minority shareholders. More recently, the MSCI China Index has provided exposure to a wider and more exciting opportunity set, but is nonetheless heavily concentrated in tech and financials.
Today, a broader spectrum of opportunities is becoming available to overseas investors through the opening up of the domestic A-share market to overseas investors. The market is broad, liquid and well diversified by sector, offering access to high quality companies and allowing investors to tap into the long-term trends that we view as the most exciting aspect of the Asia growth story.
5. A diverse investment universe
Of course, the Asian investment opportunity is not confined to China. Korea is the most innovative country in the world, according to Bloomberg's Innovation Index 2019 - with the credit going not only to market heavyweight Samsung Electronics itself but to the trickle-down effect through its supply chain and the broader economy, as well as to a regulatory environment that encourages start-ups.2
The 10 ASEAN nations together make up one of the world's most diverse markets, providing fertile ground for bottom-up stock pickers.3 And while India's challenges are widely understood, the market is home to many first-class companies with shareholder-focused management, which are well-placed to benefit from the country's long and exciting growth runway.
This is not to suggest that every company across Asia is equally well run, nor that all business models are equally attractive. The region is characterised by its variety - an argument for active management in core franchises that can deliver compounded growth over the long term.
A story of growth as well as change
Source: J.P.Morgan Asset Management, data as of Sep 1999 and Dec 2018. Based on index breakdown of MSCI AC Asia ex Japan, all in USD. As of 1st September 2016 MSCI included Real Estate as a separate sector as a result of the evolving investment landscape. Telecommunication Services Sector has been renamed to Communication Services on 1st October 2018.
1 All data for MSCI Asia ex Japan Index as a share of the MSCI All Country World Index; data as of 31 December 2018.
2 Source: Bloomberg; January 2019.
3 ASEAN is the Association of Southeast Asian Nations, and includes Indonesia, Thailand, Malaysia, Singapore, Philippines, Vietnam, Cambodia, Myanmar, Brunei and Laos.
* Joanna Kwok named #4 "best female fund manager in the world", by Citywire Alpha Female Awards 2019, in a pool of over 1,700 female managers.
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