Home2020 Market Outlook Investment ideas

2020 Market Outlook

Investment ideas

Asian asset classes should continue to satisfy investors’ thirst for income while compelling opportunities in value and Low Volatility stocks beckon. Structural themes in Asian Real Estate and China also offer investors opportunities to ride on Asia’s dynamic growth.

Reap Asia’s real estate dividend


Today, although almost half of Asia’s population lives in cities, Asia’s urbanisation level is still below that of North America (82%) and Europe (74%)1 . Asia’s urbanisation rate will only accelerate. In ASEAN alone, about 100 million people are expected to move from the countryside to the cities between 2015 and 20302.

Asia’s urbanisation rate is on the rise3

Rapid urbanisation will underpin demand for housing, offices, schools and supporting infrastructure. It also presents its own set of challenges ranging from congestion, crime and pollution. Companies and policymakers have the opportunity to harness technology and create real estate that is sustainable and efficient.

Not only will technology help reduce construction costs and time, smart buildings will also be able to enjoy energy savings and use data to provide security, control traffic etc. Asia appears poised to lead the “smart city” race in integrating technology to enhance the quality of life of its residents. Asia Pacific has already garnered 18 spots among the top 50 smart city governments ranking 4. Successful smart cities are expected to enjoy higher economic growth and more jobs, amongst other benefits.

Technological disruption within industries will create new demand for data centers, warehouses and flexible work-spaces. Ageing demographics will also reshape communities for the elderly.

While demand for Asian real estate will be strong, the landscape will constantly evolve. Companies that master digital disruption, understand global trends and have a deep understanding of customer preferences will succeed. Investors will need expertise to identify winners and diversify across the property spectrum. By tapping multiple asset classes, investors are also better positioned to fully reap the benefits from Asia’s growing real estate dividend (refer to the interview with our Head of Investment Solutions, Kelvin Blacklock).

Source:
1https://www.un.org/development/desa/publications/2018-revision-of-world-urbanization-prospects.html
2South-east Asia is getting smart with urbanisation
3Worldbank. 2018 numbers.
4Eden Strategy Institute and ONG&ONG Pte Ltd, July 2018. Ranking is based on 10 metrics: Vision. Leadership, Budget, Financial Incentives, Support Programmes, Talent-Readiness, People-Centricity, Innovation Ecosystems, Smart Policies and Track Record

Optimise your income sources


The search for income is likely to remain a key theme in 2020 as global central banks keep interest rates low and the amount of negative yielding bonds climb.

Higher yielding Asian local currency bonds may fare well as US economic outperformance and in turn, USD strength potentially moderates in the new year. We favour government bonds in countries where central banks have more room to cut rates (Indonesia, Philippines and selectively India - refer to the interview with our CIO of Fixed Income, Low Guan Yi).

Despite the bond rally in 2019, valuations of Asian corporate bonds are not at an extreme. Lower debt levels (versus 2016) will help Asian companies better weather slower growth. The amount of new bonds coming onstream in 2020 is also expected to be manageable. Interest rate and liquidity conditions are likely to remain supportive of bonds.

Wide spreads of Asian high yields (HY) versus investment grades (IG) is an attractive carry story 1

That said, we will be prudent in our selection given the still weak global growth environment. Following the strong bond market performance in 2019, investors may also want to temper their return expectations.

There is merit in diversifying income sources in 2020. Asian Real Estate Investment Trusts (REITs) for example, are viewed as being more domestically driven and thus resilient to trade concerns. Property developers in the region also look attractive, with many trading at compelling valuations given their growth profiles (refer to the interview with our Head of Investment Solutions, Kelvin Blacklock). Longer term, Asian property securities are expected to benefit from structural trends including urbanisation, a growing middle class and new listings across the region.

It may surprise some that Asia is the largest dividend paying region in the world in terms of percentage of index returns. More than three-fifths of Asia Pacific ex Japan’s 341% return over the past 20 years has come from dividends. Dividend payers are not limited to traditional yield sectors like Telecoms and Utilities; we are also finding good dividend sources in the Information Technology and Industrials sectors.

Source:
1Bloomberg, JPMorgan; based on JPMorgan Asian Credit Index (JACI) composite and sub-indices as of 1 November 2019. Please refer to www.eastspring.com/reference-index-list for more details on the indices.

Ride the volatility wave


Our analysis suggests that rising volatility tends to be supportive of Low Volatility strategies. Macroeconomic and political events, as well as news flow are likely to continue to drive markets in 2020. This could lead to potential spikes in volatility particularly with the VIX Index close to 2019’s low at the point of writing (refer to the interview with our CIO of Quantitative Strategies, Ben Dunn).

Importantly, defensive/Low Volatility stocks are attractively priced in Asia. At the point of writing, the MSCI AC Asia Pacific ex Japan Minimum Volatility Index is trading largely in line with the MSCI AC Asia Pacific ex Japan Index, versus a historical premium of about 15%. Even in instances when the market is overpaying for defensive stocks, an active approach which seeks out cheaper stocks but with similar diversification benefits can still add value to investors.

Low volatility stocks in Asia look cheap1

Low Volatility strategies can potentially offer investors a less volatile exposure to China A equities. The breadth and depth of the China A share market, its low trading costs as well as the inefficiencies arising from the high level of retail participation, create multiple opportunities for quantitative strategies to exploit.

While investors can look to Low Volatility strategies to provide a buffer against impending rises in volatility in 2020, they should ideally adopt a longer-term mindset. Country, sector and stock specific factors may cause the performance of Lower Volatility strategies to differ from the broader market in the short term. Over the long term, these effects cancel out, allowing Low Volatility strategies to deliver market-like (or better) returns but with significantly less volatility.

Source:
1MSCI. Eastspring Investments. November 2019. Please refer to www.eastspring.com/reference-index-list for more details on the indices.

Embrace the China of the future


The China A market (+30% in USD terms1) was one of the top performing markets in Asia in 2019. The fact that this performance was achieved against a backdrop of slowing Chinese growth, US-China trade worries and inflation concerns is notable. Although China’s growth is expected to slow over the next decade, structural trends will drive growth in selected sectors over the long term.

By 2035, China’s aging population (over 60 years) is expected to account for 28.5% of the population. This, coupled with low healthcare spending (5% of GDP versus 17% for the US), as well as China’s rising life expectancy and affluence will underpin demand for quality drugs and medical services.

China’s healthcare spending poised to accelerate2

In the technology sector, Chinese companies are among the world leaders in integrated circuit testing and packaging. This USD 28 billion market is expected to grow rapidly as advancements in Artificial Intelligence spur demand for more specialised semiconductor chips. Meanwhile new spending patterns of Chinese millennials and higher income levels in the lower tier cities will drive revenues in specific consumer segments.

Tapping China’s potential can however be tricky. The healthcare sector faces the risk of regulatory changes while consumer companies often grapple with shifting preferences. Meanwhile, China’s leading outsourced Assembly and Test (OSAT) companies will need to continue to innovate to meet new specifications in order to remain competitive. Investors will need experience, expertise and active management to navigate China’s dynamic market environment (refer to the interview with our CIO of Equities, Kevin Gibson).

Source:
1Bloomberg. CSI 300 Index. As of 7 Nov 2019. Please refer to www.eastspring.com/reference-index-list for more details on the indices.
2China’s Health Expenditure Projections To 2035: Future Trajectory And The Estimated Impact Of Reforms, May 2019. https://doi.org/10.1377/ hlthaff.2018.05324, by Tiemin Zhai, John Goss, Tania Dmytraczenko, Yuhui Zhang, Jinjing Li, and Peipei Chai. Authors’ analysis of data from the China National Health Accounts Report, Institute for Health Metrics and Evaluation, and China Population and Development Research Center. NOTES Data are in constant 2014 prices

Seize extreme valuation divergence


Investors gravitated once again towards momentum/growth stocks in 2019, driven by the desire for shorter-term earnings certainty amidst global growth concerns. Over the last 10 years, value stocks have underperformed growth stocks by 75%1. As a result, the divergence between the valuations of the two styles is throwing up interesting investment opportunities (refer to the interview with our CIO of Equities, Kevin Gibson).

This is particularly so in Japan where the valuations of growth versus value stocks are at an extreme, exceeding levels observed in 2016 and the 2000 tech bubble. Despite pricey valuations, positioning in growth stocks appears crowded as implied from the relatively low ratio of stocks which have outperformed the Topix 5002.

Japan’s value stocks look cheap3

On the other hand, many value stocks in Japan are being priced for recession-like conditions, despite having supportive longer-term trend earnings. This potentially leaves investors vulnerable to any surprises that could challenge currently entrenched risk preferences. This was evident in early September 2019 which saw one of the largest momentum-to-value rotations in decades. The extreme valuations also fail to acknowledge corporate Japan’s reforms, which have lifted return on equity and aggregate earnings over the years.

We are not predicting market turning points but highlighting mispriced opportunities in value stocks that exist in many markets not just in Japan but also in South Korea, Russia, Mexico and much of China (with the exception of certain Chinese technology giants).

Investors who have a longer investment horizon and a desire to re-focus on valuations may want to seize the opportunities that are emerging from the extreme valuations in the market (refer to the interview with our CIO of Quantitative Strategies, Ben Dunn).

Source:
1Bloomberg. MSCI World Growth Net Total Return USD Index. MSCI World Value Net Total Return USD Index. End October 2019.
2Topix 500. On a rolling 26-week basis. September 2019.
3Eastspring Investments, Refinitiv Datastream as at 31 October 2019. *MSCI Japan Value Index Price to Book / MSCI Japan Growth Index Price to Book. Please note that there are limitations to the use of such indices as proxies for the past performance in the respective asset classes/sector. The historical performance or forecast presented in this chart is not indicative of and should not be construed as being indicative of or otherwise used as a proxy for the future or likely performance of the Fund.
Please refer to www.eastspring.com/reference-index-list for more details on the indices.

Reap Asia’s real estate dividend

Optimise your income sources

Ride the volatility wave

Embrace the China of the future

Seize extreme valuation divergence

Reap Asia’s real estate dividend

Today, although almost half of Asia’s population lives in cities, Asia’s urbanisation level is still below that of North America (82%) and Europe (74%)1 . Asia’s urbanisation rate will only accelerate. In ASEAN alone, about 100 million people are expected to move from the countryside to the cities between 2015 and 20302.

Asia’s urbanisation rate is on the rise3

Rapid urbanisation will underpin demand for housing, offices, schools and supporting infrastructure. It also presents its own set of challenges ranging from congestion, crime and pollution. Companies and policymakers have the opportunity to harness technology and create real estate that is sustainable and efficient.

Not only will technology help reduce construction costs and time, smart buildings will also be able to enjoy energy savings and use data to provide security, control traffic etc. Asia appears poised to lead the “smart city” race in integrating technology to enhance the quality of life of its residents. Asia Pacific has already garnered 18 spots among the top 50 smart city governments ranking4. Successful smart cities are expected to enjoy higher economic growth and more jobs, amongst other benefits

Technological disruption within industries will create new demand for data centers, warehouses and flexible work-spaces. Ageing demographics will also reshape communities for the elderly.

While demand for Asian real estate will be strong, the landscape will constantly evolve. Companies that master digital disruption, understand global trends and have a deep understanding of customer preferences will succeed. Investors will need expertise to identify winners and diversify across the property spectrum. By tapping multiple asset classes, investors are also better positioned to fully reap the benefits from Asia’s growing real estate dividend (refer to the interview with our Head of Investment Solutions, Kelvin Blacklock).

Source:
1https://www.un.org/development/desa/publications/2018-revision-of-world-urbanization-prospects.html
2South-east Asia is getting smart with urbanisation
3Worldbank. 2018 numbers.
4Eden Strategy Institute and ONG&ONG Pte Ltd, July 2018. Ranking is based on 10 metrics: Vision. Leadership, Budget, Financial Incentives, Support Programmes, Talent-Readiness, People-Centricity, Innovation Ecosystems, Smart Policies and Track Record

Optimise your income sources

The search for income is likely to remain a key theme in 2020 as global central banks keep interest rates low and the amount of negative yielding bonds climb.

Higher yielding Asian local currency bonds may fare well as US economic outperformance and in turn, USD strength potentially moderates in the new year. We favour government bonds in countries where central banks have more room to cut rates (Indonesia, Philippines and selectively India - refer to the interview with our CIO of Fixed Income, Low Guan Yi).

Despite the bond rally in 2019, valuations of Asian corporate bonds are not at an extreme. Lower debt levels (versus 2016) will help Asian companies better weather slower growth. The amount of new bonds coming onstream in 2020 is also expected to be manageable. Interest rate and liquidity conditions are likely to remain supportive of bonds.

Wide spreads of Asian high yields (HY) versus investment grades (IG) is an attractive carry story1

That said, we will be prudent in our selection given the still weak global growth environment. Following the strong bond market performance in 2019, investors may also want to temper their return expectations.

There is merit in diversifying income sources in 2020. Asian Real Estate Investment Trusts (REITs) for example, are viewed as being more domestically driven and thus resilient to trade concerns. Property developers in the region also look attractive, with many trading at compelling valuations given their growth profiles (refer to the interview with our Head of Investment Solutions, Kelvin Blacklock). Longer term, Asian property securities are expected to benefit from structural trends including urbanisation, a growing middle class and new listings across the region.

It may surprise some that Asia is the largest dividend paying region in the world in terms of percentage of index returns. More than three-fifths of Asia Pacific ex Japan’s 341% return over the past 20 years has come from dividends. Dividend payers are not limited to traditional yield sectors like Telecoms and Utilities; we are also finding good dividend sources in the Information Technology and Industrials sectors.

Source:
1Bloomberg, JPMorgan; based on JPMorgan Asian Credit Index (JACI) composite and sub-indices as of 1 November 2019. Please refer to www.eastspring.com/reference-index-list for more details on the indices.

Ride the volatility wave

Our analysis suggests that rising volatility tends to be supportive of Low Volatility strategies. Macroeconomic and political events, as well as news flow are likely to continue to drive markets in 2020. This could lead to potential spikes in volatility particularly with the VIX Index close to 2019’s low at the point of writing (refer to the interview with our CIO of Quantitative Strategies, Ben Dunn).

Importantly, defensive/Low Volatility stocks are attractively priced in Asia. At the point of writing, the MSCI AC Asia Pacific ex Japan Minimum Volatility Index is trading largely in line with the MSCI AC Asia Pacific ex Japan Index, versus a historical premium of about 15%. Even in instances when the market is overpaying for defensive stocks, an active approach which seeks out cheaper stocks but with similar diversification benefits can still add value to investors.

Low volatility stocks in Asia look cheap1

Low Volatility strategies can potentially offer investors a less volatile exposure to China A equities. The breadth and depth of the China A share market, its low trading costs as well as the inefficiencies arising from the high level of retail participation, create multiple opportunities for quantitative strategies to exploit.

While investors can look to Low Volatility strategies to provide a buffer against impending rises in volatility in 2020, they should ideally adopt a longer-term mindset. Country, sector and stock specific factors may cause the performance of Lower Volatility strategies to differ from the broader market in the short term. Over the long term, these effects cancel out, allowing Low Volatility strategies to deliver market-like (or better) returns but with significantly less volatility.

Source:
1MSCI. Eastspring Investments. November 2019. Please refer to www.eastspring.com/reference-index-list for more details on the indices.

Embrace the China of the future

p>The China A market (+30% in USD terms1) was one of the top performing markets in Asia in 2019. The fact that this performance was achieved against a backdrop of slowing Chinese growth, US-China trade worries and inflation concerns is notable. Although China’s growth is expected to slow over the next decade, structural trends will drive growth in selected sectors over the long term.

 

By 2035, China’s aging population (over 60 years) is expected to account for 28.5% of the population. This, coupled with low healthcare spending (5% of GDP versus 17% for the US), as well as China’s rising life expectancy and affluence will underpin demand for quality drugs and medical services.

China’s healthcare spending poised to accelerate2

In the technology sector, Chinese companies are among the world leaders in integrated circuit testing and packaging. This USD 28 billion market is expected to grow rapidly as advancements in Artificial Intelligence spur demand for more specialised semiconductor chips. Meanwhile new spending patterns of Chinese millennials and higher income levels in the lower tier cities will drive revenues in specific consumer segments.

Tapping China’s potential can however be tricky. The healthcare sector faces risk of regulatory changes while consumer companies often grapple with shifting preferences. Meanwhile, China’s leading outsourced Assembly and Test (OSAT) companies will need to continue to innovate to meet new specifications in order to remain competitive. Investors will need experience, expertise and active management to navigate China’s dynamic market environment (refer to the interview with Kevin Gibson).

Source:
1Bloomberg. CSI 300 Index. As of 7 Nov 2019. Please refer to www.eastspring.com/reference-index-list for more details on the indices.
2China’s Health Expenditure Projections To 2035: Future Trajectory And The Estimated Impact Of Reforms, May 2019. https://doi.org/10.1377/ hlthaff.2018.05324, by Tiemin Zhai, John Goss, Tania Dmytraczenko, Yuhui Zhang, Jinjing Li, and Peipei Chai. Authors’ analysis of data from the China National Health Accounts Report, Institute for Health Metrics and Evaluation, and China Population and Development Research Center. NOTES Data are in constant 2014 prices

Seize extreme valuation divergence

Investors gravitated once again towards momentum/growth stocks in 2019, driven by the desire for shorter-term earnings certainty amidst global growth concerns. Over the last 10 years, value stocks have underperformed growth stocks by 75%1. As a result, the divergence between the valuations of the two styles is throwing up interesting investment opportunities (refer to the interview with our CIO of Equities, Kevin Gibson).

This is particularly so in Japan where the valuations of growth versus value stocks are at an extreme, exceeding levels observed in 2016 and the 2000 tech bubble. Despite pricey valuations, positioning in growth stocks appears crowded as implied from the relatively low ratio of stocks which have outperformed the Topix 5002.

Japan’s value stocks look cheap3

On the other hand, many value stocks in Japan are being priced for recession-like conditions, despite having supportive longer-term trend earnings. This potentially leaves investors vulnerable to any surprises that could challenge currently entrenched risk preferences. This was evident in early September 2019 which saw one of the largest momentum-to-value rotations in decades. The extreme valuations also fail to acknowledge corporate Japan’s reforms, which have lifted return on equity and aggregate earnings over the years.

We are not predicting market turning points but highlighting mispriced opportunities in value stocks that exist in many markets not just in Japan but also in South Korea, Russia, Mexico and much of China (with the exception of certain Chinese technology giants).

Investors who have a longer investment horizon and a desire to re-focus on valuations may want to seize the opportunities that are emerging from the extreme valuations in the market (refer to the interview with our CIO of Quantitative Strategies, Ben Dunn).

Source:
1Bloomberg. MSCI World Growth Net Total Return USD Index. MSCI World Value Net Total Return USD Index. End October 2019.
2Topix 500. On a rolling 26-week basis. September 2019.
3Eastspring Investments, Refinitiv Datastream as at 31 October 2019. *MSCI Japan Value Index Price to Book / MSCI Japan Growth Index Price to Book. Please note that there are limitations to the use of such indices as proxies for the past performance in the respective asset classes/sector. The historical performance or forecast presented in this slide is not indicative of and should not be construed as being indicative of or otherwise used as a proxy for the future or likely performance of the Fund.
Please refer to www.eastspring.com/reference-index-list for more details on the indices.