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Asia is seeing higher investor interest due to the region’s growth potential and there are several investment opportunities still waiting to be unearthed, despite the uncertainties and risks that come with it. In its latest white paper on Asia equity titled ‘Harnessing change in Asia’, Nikko Asset Management identified three investment megatrends that are prevalent across Asia that can help investors “harness the tremendous changes occurring in healthcare, consumption, and the net zero transition.”
Talking about the home bias phenomenon among investors, Nikko AM worked with the Frankfurt School of Finance & Management to delve deeper into the benefits of international diversification into Asia.
Olaf Stotz, Professor of Asset Management and Pension Economics, at the Frankfurt School of Finance & Management, says, “On average, European investors forgo risk‐adjusted returns of more than 1.3% per annum. This translates to annual losses of about €200 bn for European investors,” due to the home bias phenomenon.
To mitigate these costs, Stotz suggests the following channels — investors must increase world market holdings and decrease holdings in domestic stocks, investors should add quality stocks to their portfolio, and investors must consider valuation arguments and perspective of human capital when investing.
“The undervaluation of Asia‐Pacific stocks may likely result in a higher future return than in the past, and stocks in North America (and, therefore, the world portfolio) may deliver lower returns. We assume that 50% of the undervaluation in Asia‐Pacific stocks is reduced and 50% of the overvaluation in North America is reduced over the next decade,” as per Stotz.
Asia equity megatrends
The Nikko AM study identifies three megatrends in the region which make a case for investing in Asia equity.
Net Zero – Made in Asia
The Asia Pacific region is a major contributor to global carbon emissions, as two of the world’s top polluters are China and India. While the 2015 Paris Agreement lays down the foundation of net zero goals, not much has changed. Developing economies, like those in Asia, have been calling for equity when it comes to the responsibility of reducing emissions as they are using the same sources of energy that developed countries have used over the past two centuries.
“Of course, Asia has a vested interest in tackling climate change given it already faces an increasing number of extreme weather events, including deadly heatwaves, severe hurricanes, and droughts,” writes Nikko AM in the research report. “This, together with comparable or even cheaper levelised cost of energy (LCOE) for renewables versus fossil fuels mean it is no surprise, therefore, that Asian economies are committing to net zero targets and putting in place policies to get there.”
From an investment perspective, the asset manager says that the following are key opportunities — overhauling of domestic power grids, green energy equipment, and electrification of transport.
Consumption
For a long time, Asia’s consumption trends were thought to be linked to the trends in the West, but Asian consumers have diverse tastes and influences and are now dictating global trends.
Nikko AM cites McKinsey which calls Asia “a $10 tn consumption growth opportunity”. “Asia’s population makes it the most significant consumer market in the world. Moreover, the rapid economic growth of many Asian countries has increased disposable incomes,” writes Nikko AM.
Talking about the various parameters for this megatrend, the investment management firm discusses the diversity in Asia, the region’s younger demographics, the rise of domestic Asian brands, rising consumption trends in lower-tier cities, and changing consumption patterns due to awareness of environmental and social issues.
Healthcare opportunities
When talking about Asia equity investments, healthcare innovation is a crucial trend as decade-old investments are now bearing fruit.
Talking about the healthcare story in Asia, Nikko AM says that an ageing population, coupled with the vast population of Asia, has created a huge demand for access to healthcare services and medicines. The investment manager compares the region’s healthcare sector to the technology sector and says that Asia has undergone a dramatic transformation over the past decade thanks to government policies, incentives and strategic priorities.
The research by Nikko AM touches on several points when talking about investment opportunities, ranging from drug manufacturing, demand for generic medicines, biologic medicine and biosimilars, higher innovation and the rise of Asian contract service providers.
“The number of healthcare-related companies in the Asian investible universe is expanding every year. Even so, healthcare still represents a very small percentage of Asia ex-Japan equity markets, suggesting this is an opportunity the rest of the world has yet to recognise or put a fair value on,” says Nikko AM.
In its final notes, Nikko AM talks about where Asia is headed and why investors need to reconsider their home bias and rebalance their investment portfolio. “The three investment megatrends discussed in this white paper – healthcare, consumption and net zero initiatives – demonstrate the direction of travel for Asia. And returning to the home bias thesis expressed so eloquently by Professor Stotz, it appears that home bias will soon prove increasingly hard for investors in the west to justify,” writes Robert Mann, Head of Asian Equities at Nikko AM.
The full white paper can be downloaded here.
