In a world of low growth and even lower interest rates, many investors are facing a dilemma. Do they invest in riskier assets and hope for the best or stick with safer options that generate low levels of income, in many instances with negative real returns?
It’s not a fantasy land. It’s reality, particularly for those at or nearing retirement.
Cash, in many instances, is offering negative real returns. Fixed income instruments, too, fit that bill, with those that don’t often seem as highly speculative investments. Then there’s developed market stocks and property, believed by many to be at already stretched valuations, particularly after being pumped up by years of ultra lose monetary policy in the wake of the global financial crisis.
When it comes to your capital, there’s seemingly a lot of risk being taken to get very little in return.
However, all is not lost. Occasionally there are ideas that float by that capture our attention.
One such note hit our inbox earlier today, courtesy of Herald van der Linde, head of Asia Pacific equity strategy at HSBC.
He’s known as “The Flying Dutchman”.
Combining trends in globalisation and the rise of an Asia’s middle class, van der Linde has identified 10 investment themes for Asia in the coming decade, stating that he believes they can “generate above-average growth irrespective of the macro backdrop”.
“Asia has benefitted from globalisation in the past few decades,” he says.
“The associated accumulation of wealth set in motion various trends across the region, such as urbanisation, the rise of an Asian middle class, but also demand for a cleaner environment and healthier lifestyles.
“These trends are set to continue.”
Here are the trends that he expects to play out, along with a few examples of the stocks that he believes will benefit more than most.
Regardless of movements in interest rates or the state of the business cycle, van de Linde believes they won’t be able to put these processes in reverse.
- From market stall to super mall: As urban centres develop, so does formal retail. Consumers are willing to pay higher prices for better quality, a process called “premiumisation”. In addition, differences in urban infrastructure have led to a proliferation of different retail formats across the region. This offers growth opportunities for companies that can react to these changes, such as Uni-President (1216 TT, TWD62.30, Buy; an HSBC Asia Super Ten portfolio constituent stock) in Taiwan, Hindustan Unilever (HUVR IN, INR869.35, Buy) in India, and Matahari Department Stores (LPPF IJ, IDR20,000, Buy) in Indonesia.
- Beauty and the East: The pursuit of physical beauty and better health has become big business in Asia. There is steady growth in spending on cosmetic surgery, as well as on general health products. While positive for healthcare companies in general – from hospitals and drug manufacturers to companies selling cosmetic surgery products – the dynamics and intensity of competition vary widely by country and sub-sector. India’s Apollo Hospitals (APHS IN, INR1,303.10, Buy), for example, is at the tail-end of a large rollout of new capacity. In China, competition in cosmetic surgery is heating up.
- Robots rule: Japan and Korea have 10x as many robots per worker as China. We expect this to change. As wages in China rise and demand for automated processes and service robots rises, more companies have jumped into this market. While competitive, we look for those that are dominant in particular applications, such as Taiwan’s Delta (2308 TT, TWD152.50, Buy). Virtual reality (VR) is another growth area with plenty of new applications; all need OLED screens, an area of strength of some Korean companies.
- Financial inclusion: More Asians have better access to a wider range of financial services than ever before. This benefits banks, insurers, asset managers in countries where this trend is strong, such as India, Indonesia and the Philippines.
- Travel and exploration: Asians are travelling more and booking more trips through online travel agents. Regional networks have started to emerge – China’s Ctrip (CTRP US, USD40.65, Hold) acquired a stake in an Indian online travel agent earlier this year. More travel also benefits duty free shops and makers of luggage.
- Defence on the offence: As defence budgets rise across the region, we identify the companies that stand to benefit most in China, Korea and India.
- New energy: Demand for renewables is rising as countries commit to decarbonising their power mix. Wind and solar are the obvious growth sectors, but the volatility in the energy they generate requires a smarter electricity grid (good news for the makers of this specialised equipment). In China, grid access for wind and solar power is improving. In India, debt issues related to the distribution of electricity are gradually being handled.
- Charge me: If the percentage of electric vehicles on the road rises to 3.8% in 2020 from 0.4% in 2014, demand for lithium-ion batteries will rise 14x. This benefits battery makers in Korea, such as Samsung SDI (006400 KS, KRW105,500, Buy). However, also think about the green car movement in Indonesia (Astra International (ASII IJ, IDR6,700, Buy)), India’s hybrid car makers (Tata Motors (TTMT IN, INR449.40, Buy)), and Chinese electric component makers, such as Hongfa (600885 CH, RMB30.30, Buy).
- New media models: Across Asia, consumers are increasingly willing to pay for online video and music content. This marks a shift away from the advertising-driven business models to one where consumers pay. This offers growth opportunities for online portals (Baidu (BIDU US, USD163.92, Buy) in China, but also Naver (035420 KS, KRW739,000, Buy) in Korea), as well as content providers, including movie makers in China and Korea.
- Asia’s global challengers: To facilitate urbanisation, investments in urban infrastructure were required. Companies involved in connecting cities and urban lifestyles acquired new skills and technologies in the process. This allowed some to emerge as global challengers in their respective industries. Think of Infosys (INFO IN, INR1,211.60, Buy) in India, China’s ZTE (763 HK, Not Rated) and Haier (1169 HK, HKD11.12, Buy), and also Jollibee (JFC PH, Not Rated) in the Philippines.
While the investment options presented by van de Linde may not suit the risk appetite of all investors, it’s clear that when it comes to growth opportunities in the 21st century, technology and Asia are often intertwined.
At a time when many are complaining about a lack of palatable investment opportunities at home, perhaps its time to look outside the box.