4Q 2021 Asia Pacific Equity Outlook: Understanding Regulatory Change

Understanding Regulatory Change

Portfolio Manager Jin Zhang focuses on China: policy goals, innovation, growth prospects and pitfalls to avoid.

• Chinese regulators want to prevent large internet platforms from using their market positions to extract economic gains from vendors or users, and instead focus them on innovation. For example, Alibaba and Tencent are investing in growth areas like the cloud. There are many truly innovative businesses in China across semiconductors, software, artificial intelligence and med-tech. There is caution in China around foreign technology providers, which is providing a push to localized players.
• It is important to understand China’s policy goals and how they can impact companies. We have long identified risks in real estate and are cautious around financials. However, outside a few hot areas, valuations in China are reasonable, as are growth prospects.
• In South Korea, there is legislative focus on worker conditions in the gig economy. But there is also a legal process with debate and feedback from industries. We expect the result to be manageable for companies.
• In our view, India has been one of the best performing markets this year. While some parts of the market have become more expensive, others are still underappreciated. Areas like home appliances or financial services have good near-term demand and a potential long runway for growth. We believe investors in India can benefit from identifying quality companies and holding them over the long term.
• Taiwan’s market has been a beneficiary of the semiconductor shortage. The outcome of the situation depends on end uses for chips. The automobile business has seen the most severe shortages, although the situation is being resolved steadily. The important thing is to find businesses that will do well despite the shortages.
• We believe by being at the forefront of chip production, Taiwan Semiconductor Manufacturing Corp has benefited from structural demand. Similarly, WIN Semiconductors and Realtek cater to structural demand for communication chips. Investors should think beyond short-term issues and look for companies with structural drivers.

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