Asian equities & ESG outlooks 2019

Channels: SAA/ALM, Managers, Outsourcing, Risk, Governance

Companies: Nordea Asset Management, Alibaba, NMC Health, Samsung SDI, Bank Rakyat, Hans Laser, Hindustan Unilever

People: Hilde Jenssen

Hilde Jenssen, product manager for fundamental equities at Nordea Asset Management provides a 2019 outlook for equities in the Asian region as well as latest trends in environmental, social and governance factors (ESG). The outlook is based on views from Nordea Asset Management emerging markets portfolio management team.

 


Looking into 2019, we are very positive on Asia and emerging markets (EM). After significant share price corrections in 2018, Asian and EM equities are very attractive from a valuation point of view and we believe there are several additional tailwinds for the asset class.

First, the GDP differential between Asia/EM GDP growth is widening, as the US economy is likely to decelerate in 2019 while most Asian economies are likely to maintain a high and steady growth. This is important as it is a reversal of a decade long trend and this differential has historically driven the outperformance of Asia and Emerging Markets.

Second, as the US policy rate gets closer to neutral levels, the US Fed is more likely to pause monetary tightening which would support an appreciation of many Asian and EM currencies and reverse liquidity flows.

Third, there is an increased likelihood of a cyclical recovery in Asia and EM as loan growth and capex are at cyclical lows.

Finally, any resolution or de-escalation of the US-China trade war will boost sentiment as the markets have already priced in a growth deceleration.

We continue to focus our investments in companies and sectors that are well-positioned to benefit from this economic transformation, have strong and sustainable competitive advantages, can generate positive returns on their invested capital, and manage all their stakeholders in a way that maximizes long-term shareholder return.

We favour the Indian market where we find great investment opportunities, particularly in the financial and consumer sectors. The Indian economy still offers huge potential in terms of urbanisation and industrialisation and most products and services are underpenetrated.

We also find great opportunities in China as focus on deleveraging the overall economy are positive for China's long-term future. Earnings expectations and multiples for the Chinese equity market have come down substantially, and this provides the occasion to invest in companies within the industries that we find most attractive, which includes software, internet, e-commerce, artificial intelligence, industrial automation, online gaming, and consumer goods and services.

We also see strong investment opportunities in Korea and Taiwan, primarily in the EV battery and semiconductor industries.

In summary, Asia and Emerging Markets continue to be supported by very attractive long-term fundamentals including higher growth, higher savings rates, lower debt levels, younger populations, reform, productivity gains and adoption of new technology. These fundamentals, coupled with low expectations and valuation levels that are attractive, should drive the investment universe in 2019.

ESG trends

In 2018 we saw a number of environmental, social and governance (ESG) related developments among our emerging stars holdings. Alibaba and NMC Health, two core holdings, released their first sustainability reports.

Alibaba, the leading Chinese e-commerce platform, reported large improvements in intellectual property protection as it has developed sophisticated systems for detecting and dealing with fraudulent items. This is a key ESG risk for Alibaba and we are encouraged by this improvement.

NMC Health, a UAE hospital operator, disclosed health and safety KPIs including quality of healthcare, prevention and control of infection, handling hazardous material and many others.

In addition, the responsible investment and Investment teams have engaged with a number of holdings during the year. This includes Samsung SDI, the top global EV battery maker, on improving the cobalt supply chain management and Varun Beverages on plastics recycling and water resource management.

Looking into 2019, we see continued great opportunities across our universe.

In Indonesia, Bank Rakyat continues to promote financial inclusion via its outstanding microfinance franchise.

In China, Hans Laser is contributing to increased energy efficiency in manufacturing by selling laser-based equipment for cutting, welding and drilling.

In India, Hindustan Unilever is improving everyday lives by making household and personal care products like detergent, shampoo and toothpaste available in 7 million outlets thanks to its extensive distribution network.