Western economies are currently attempting a difficult juggling act aimed at controlling inflation but avoiding recession, but the picture in Asia is much more positive. The region boasts many large, populous, fast-growing economies that together account for roughly 40% of the world’s GDP1. Major structural and social changes such as digitalisation and urbanisation will ensure these economies continue to grow rapidly, with domestic demand supported by the increasing prosperity of Asia’s expanding middle class. The region is also home to many innovative and dynamic companies that are leaders in a wide range of industries, including semiconductor manufacturing, healthcare, renewable energy and next generation automotive production.
These are the kinds of companies targeted by JPMorgan Asian Growth and Income (JAGI). It aims to provide both capital growth and income by investing in the very best companies in the Asian region, ex-Japan. Specifically, JAGI’s manager focuses on high quality businesses that possess a competitive edge, good management, robust balance sheets, strong growth prospects and the capacity to generate multi-year compound returns. At times they also look to add value by investing opportunistically in businesses set to benefit from a cyclical recovery in earnings.
Growth potential of Indian and Indonesian banking sectors
JAGI’s managers find that the most appealing, attractively valued investment ideas tend to be clustered in a few sectors, especially financials and information technology, while other sectors such as consumer staples and real estate offer fewer investment possibilities. The Company’s largest sectoral overweight is to financials, where the portfolio holds a combination of banks, insurance companies and other financial service providers. The managers prefer Indian and Indonesian banks, as both these countries possess particularly supportive demographics and are underbanked, which gives them the greatest scope for growth over time. Indian and Indonesian banks are also increasing their product offerings and digitalising their services, which will provide cheap and easy online access to their growing customer bases. India’s HDFC and Axis Bank and Indonesia’s Bank Central Asia are amongst JAGI’s top 10 holdings.
Asian demand for insurance services is also expanding rapidly, in line with rising incomes across the region. The sector is seeing particularly strong growth from China and India, the region’s two most populous nations. AIA Group, a Hong Kong-based life insurance company, numbers amongst the Company’s top 10 holdings, and is its second largest overweight. The managers also like Asian stock exchanges, which offer exposure to the rapid growth in the region’s financial markets, regardless of the direction of these markets at any given time. For example, Hong Kong Exchanges and Clearing is the portfolio’s fifth largest holding and heaviest overweight.
Significance of Asian technology stocks
JAGI is also overweighting in information technology stocks, including Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest semiconductor producer, which supplies key components for Apple iPhones, electric vehicles, and a myriad of other digital products. The permeation of digital products into many aspects of everyday life also underlies the Company’s exposure to South Korea’s Samsung, one of the world’s leading producers of electronic goods. Tencent, China’s internet content behemoth, is another key holding. Tencent is the world’s largest vendor of video games, and owner of WeChat, one of the biggest social media platforms, as well as being an investor in technology start-ups across Asia. TSMC, Samsung and Tencent comprise JAGI’s top three holdings.
Consumer staples is the portfolio’s largest underweight. While this sector includes many very good companies with widely recognised brands, the managers believe these stocks are generally expensive. The managers are also underweighting in real estate and are especially cautious about the Chinese property sector due to persistent oversupply and regulatory uncertainties, and they avoid the sector in general as they see more attractively valued opportunities elsewhere.
Upbeat on valuations
JAGI’s managers are upbeat about the outlook for Asian equities, citing several reasons why now may be a particularly good time to invest in this market. The first reason is valuations. Having been revised down in recent years, valuations are now at the point where the market is looking relatively cheap by historical standards. In addition, the managers expect corporate earnings to recover this year and beyond. They forecast especially strong earnings rebounds in China, Indonesia, and South Korea. As equity markets usually begin anticipating earnings recoveries months in advance, the managers forecast an improvement in Asian markets from the second half of 2023 onwards. In their view, the US interest rate cycle is also likely to provide a tailwind for regional stock markets this year. With US rates set to plateau, the US dollar should stabilise or even weaken, limiting or reducing the USD value of Asia’s debt obligations and energy imports, and improving trade flows.
JAGI’s managers have already taken advantage of current low valuations to add interesting new names to the portfolio at good prices and top up existing holdings. They believe that their long experience, their presence on the ground in local markets and their focus on the fundamental analysis of specific stocks, will allow them to keep identifying the best investment opportunities on offer across the Asian region. This should ensure the Company continues to provide shareholders with attractive returns and outperformance over the long term.