Key Points
- China’s reopening story continues to bolster the region.
- The waning of US-dollar strength and weaker commodity prices should provide Asian economies with greater flexibility.
- We are positive on the longer-term prospects for Indonesia and Singapore.
Asia, like everywhere else, endured a tough 2022 as inflation and interest rates ratcheted up across the world. But it was particularly hurt by the strong US dollar, which weighed on monetary policy in the region. Meanwhile, China’s rolling lockdowns and legacy Covid restrictions proved a powerful headwind for markets.
The outlook for the rest of 2023 is uncertain as the impact of higher interest rates has yet to be digested, and quite where US ‘terminal’ rates end up remains to be seen, especially in light of recent volatility within the US and European financial sector. Nonetheless, we are relatively sanguine about Asia’s ability to weather the storm. And our focus has moved to the extent to which headwinds might be easing. China’s reopening story continues to bolster the region. The waning of US-dollar strength and weaker commodity prices should provide Asian economies with greater flexibility.
Business Models That Are Fit for the Future
We search for companies with business models that are fit for the future – with good moats surrounding their businesses. We target companies that operate in well-structured industries where they have a genuine competitive edge, strong balance sheets to get them through tough times, and supportive growth tailwinds backed by thematic support.
Beyond China
At the country level, we think diversity is key. In our view, investors should not just buy Asia for Asia’s sake or for yield’s sake. If they do, they can quickly find themselves exposed to state-owned enterprises such as Chinese banks. It is important to be discerning.
Our Asian Income strategy’s long-held underweight in China means it has been able to sit out much of the first-hand ramifications of China’s geopolitics and avoid some of the dubious governance practices that seem to be rife there.
Under the Radar – Indonesia and Singapore
We are positive on the longer-term prospects for Indonesia, which boasts a strong demographic profile and has been a beneficiary of reshoring and growing foreign direct investment. Indeed, several companies within the electric-vehicle supply chain have set up manufacturing and production in Indonesia.
For example, we have found opportunities within Indonesia’s banking sector. The macroeconomic dynamics in Indonesia are attractive and supportive of loan growth. We believe that some of the banks with strong competitive advantages should be well positioned to continue to generate high returns after several years of restructuring, investment in technology and improved risk-management practices.
Singapore is another favored area, boasting strong governance and attractive dividend yields, while its companies benefit from solid inter-regional trade, most notably with South-East Asian economies.
In particular, we have identified an exchange operator which we think is well positioned to benefit from the volatile macroeconomic environment as well as increased trading and hedging activity. Such activities generate high levels of free cash flow and can deliver reliable dividends, a particularly attractive characteristic given the uncertain economic environment.
Authors
Zoe Kan
Portfolio manager, emerging markets and Asia equities team
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that strategy holdings and positioning are subject to change without notice. For additional Important Information, click on the link below.
Important information
For Institutional Clients Only. Issued by Newton Investment Management North America LLC ("NIMNA" or the "Firm"). NIMNA is a registered investment adviser with the US Securities and Exchange Commission ("SEC") and subsidiary of The Bank of New York Mellon Corporation ("BNY Mellon"). The Firm was established in 2021, comprised of equity and multi-asset teams from an affiliate, Mellon Investments Corporation. The Firm is part of the group of affiliated companies that individually or collectively provide investment advisory services under the brand "Newton" or "Newton Investment Management". Newton currently includes NIMNA and Newton Investment Management Ltd ("NIM") and Newton Investment Management Japan Limited ("NIMJ").
Material in this publication is for general information only. The opinions expressed in this document are those of Newton and should not be construed as investment advice or recommendations for any purchase or sale of any specific security or commodity. Certain information contained herein is based on outside sources believed to be reliable, but its accuracy is not guaranteed.
Statements are current as of the date of the material only. Any forward-looking statements speak only as of the date they are made, and are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward-looking statements. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment and past performance is no indication of future performance.
Information about the indices shown here is provided to allow for comparison of the performance of the strategy to that of certain well-known and widely recognized indices. There is no representation that such index is an appropriate benchmark for such comparison.
This material (or any portion thereof) may not be copied or distributed without Newton’s prior written approval.
In Canada, NIMNA is availing itself of the International Adviser Exemption (IAE) in the following Provinces: Alberta, British Columbia, Manitoba and Ontario and the foreign commodity trading advisor exemption in Ontario. The IAE is in compliance with National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Comments