Quality Growth Boutique

3Q 2021 Asia Pacific Equity Outlook: Finding Growth Between the Extremes


Finding Growth Between the Extremes

Portfolio Manager Brian Bandsma discusses regulations in Chinese tech companies, inflation and valuations.

  • Asia Pacific equities generated positive returns but have lagged year-to-date. The index, which is weighted towards larger Chinese tech companies, has been impacted by increased regulatory scrutiny in the tech sector and momentum that fueled some growth stocks has moderated.
  • Chinese government concerns around tech are specific to merchant exclusivity agreements and subsidies that make it difficult for smaller players to compete. Most regulatory issues have been resolved and future risks are largely priced into the share prices of Alibaba and other companies.
  • Today it is more difficult to identify high quality companies trading at low valuations than it was 20 years ago. At the value end of the spectrum, companies may provide yield but are not growing. As a result, their valuations reflect the fact that they cannot provide longer-term compounding growth.
  • There are some stretched valuations today for earlier-stage businesses where growth potential and profitability are less visible, particularly in sectors like health care and internet services. Investors that are reaching into the future for cash flows are taking increased risk.
  • It is important to keep a close eye on inflation. The region has suffered greater waves of higher inflation than other regions in the past, and we see signs that it can take off. However, we are not excessively concerned about the risk of inflation at the moment.
  • Some segments of Asia Pacific economies can benefit from short-term inflation. For example, Southeast Asia, where income is tied to soft commodities and agricultural products, can receive a near-term boost from inflation. But over the long-term, inflation generally has a corrosive effect on equity returns.
  • The spike in COVID-19 cases in India is easing, which bodes well for the country’s recovery. The international community is also giving more direct aid to countries like India to help with vaccination programs. Indian equities have continued to perform, and it is hoped that the country can avoid a significant third wave.
  • While the US stance on China has not fundamentally changed with the Biden administration, it is now seeking a more coordinated international response and taking a more consistent line on policy. China’s president has also indicated that the country should take a more diplomatic approach in its dealings with the rest of the world, which may give some cause for optimism.

 

research-at-work-icon

 

Subscribe to our Equity Research at Work podcast on your favorite player.
apple-podcasts
google-podcasts
spotify
tunein
rss