Duncan Robertson

Market Outlook

Asia Outlook


Latest Asian economic and market outlook. 


Global equity markets have sold off amid expectations that the peak in US interest rates will likely be higher and rates will take longer to come down than previously expected. The primary reason for higher rate expectations is that developed world labour markets remain very tight. Whilst wage growth could remain sticky, other aspects of inflation should continue to fall, with energy costs having already corrected to a very significant degree in both Europe and the US. Our core view therefore remains that we will see real wage growth accelerate, resulting in an improving picture for the Western consumer. However, it is also likely that Western consumers will feel the pain of higher rates with a lag. House prices in most developed markets are correcting, which will almost certainly lead to a negative wealth effect. We are therefore continuing to focus more of our time on stocks driven by domestic Asian demand in economies that we regard as structurally attractive: principally India, Indonesia and Vietnam.

We have recently returned from research trips to both India and Vietnam, with contrasting conclusions. Our trip to India enhanced the conviction in our positive view, whilst our visit to Vietnam brought some near-term caution to our constructive long-term view on the country. The big picture reason to like Vietnam is essentially unchanged. It has a very strong export engine and is gaining market share from China, with Apple’s decision to shift MacBook and EarPod manufacturing to Vietnam the latest high-profile wins. It is also wisely focused on moving up the value-added curve, both with respect to the nature of the products being produced, and the level of local content involved in production. However, in the short term it is a one-party communist regime that is currently undergoing a strong anti-corruption clampdown. This anti-corruption campaign is likely to last for a few years, until a new Party Chairman is chosen in 2025. As we know from China, these clampdowns are far from painless and can have unintended consequences. Often they lead to situations where officials are scared to make decisions, which unfortunately is what we are now seeing in Vietnam. Decisions that should be run-of-the-mill are having to be passed all the way up to the Prime Minister, which is far from optimal. This anti-corruption campaign has overlapped with issues in the property sector. A particularly high-profile arrest of the chairlady of property company VTP has snowballed into broader weakness in the sector, with No Va Land, one of the country’s largest developers, defaulting on a bond payment recently. Much of this weakness seems priced in, with Vietnam trading at low valuations to its own history and the region. We are likely to continue to keep sizeable exposure to the country. However, we may reduce our exposure to banks that face higher risks from property defaults.

India continues to represent a compelling long-term opportunity in our view. We expect to see a marked pickup in the investment cycle, which should lead to an acceleration in economic growth due to the multiplier effect of investment. This conclusion is based on a number of observations from our recent research visit. Firstly, the banking system is well capitalised and profitable. It is therefore able to fund an investment cycle. The corporate sector is also profitable and cash generative, and is seeing rising capacity utilisation. Thus, it appears to have the means and motivation to invest. Moreover, the recent Budget was extremely supportive of infrastructure, and we expect the government will continue to prioritise infrastructure investment as major headwinds to higher infrastructure spending have eased in recent years. In fact, we expect infrastructure capex in India to grow at a 9-11% CAGR over the next few years, driven by the National Infrastructure Pipeline, which envisages >US$1.3tn of capex for FY20-25 versus c.US$700m over FY13-19. Meanwhile, the government’s support for private capex should continue. The Production Linked Incentive scheme is a key component of the Make in India initiative to boost manufacturing output from 17% of GDP to 25% of GDP by 2030. It is widely deemed to have been a success and will likely be expanded. At the same, India is enjoying record Foreign Direct Investment inflows, with Apple’s decision to shift a significant proportion of its iPhone production to India just one high profile example of this. Finally, we believe that the property cycle will also be supportive, particularly given the country’s focus on affordable housing. With all this in mind, we have increased our overweight to India, and feel this is an opportune time to do so as India’s premium to the region has come back in line with its historic average following the recent period of underperformance.

Chinese markets have been weak recently as investors have once again focused on geopolitical risk in the wake of the balloon incident. Although we have selectively added to Chinese Internet stocks, which we think are very cheap and should benefit from economic reopening, China is likely to remain a significant underweight for the fund overall. As discussed in previous commentaries, the country faces many structural issues in terms of debt levels, demographics, geopolitics, weakness in the property and construction sectors, and weaker governance standards than other Asian markets. 

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