Investment trends | Standard Chartered

Why Asia’s tech industry is a magnet for investors

Clive McDonnell — Tue, 22 May 2018 14:01:46 +0000

Home to two of the world’s biggest technology companies – Samsung and Tencent – Asia’s tech sector is increasingly becoming a global force to be reckoned with, offering good value for investors and consumers alike.

‘Winner takes all’ is the new mantra for Asia’s cash-rich tech companies, which span the technology spectrum from cloud computing to internet shopping, as they spend to increase their market share. The growing trend for mergers and acquisitions in the sector helped Asia tech stocks rise by an impressive 60 per cent in 2017.

Meanwhile, sovereign wealth funds are eager for a piece of the pie. They’ve been pouring money into Asia’s technology ‘unicorns’ – private companies valued at USD1 billion or more – in a bid to get maximum exposure to the most promising tech companies, and their eggs are not confined to one basket.

"Despite the huge wave of investment, Asia's technology industry is still in its infancy"

Clive McDonnell Head of Equity Investment Strategy

In some cases, private funds are backing two or more companies that provide the same services in the same country, in a bid to ensure they end up the winner, whichever investment comes out on top. Moves like this demonstrate just how big investors think the prize is.

And as the battle to back the right companies continues, consumers in some of Asia’s fastest-growing economies are proving to be the biggest winners of all as they leapfrog their way into the future. Across India, Indonesia, the Philippines and China, affordable smartphones act as the gateway to the internet for those who could not dream of owning a personal computer, while the traditional aspiration to own a car is being replaced with the convenience of on-demand transport apps.

A growing, but infant, industry

Yet despite the huge wave of investment, we believe Asia’s technology industry is still in its infancy, especially given the significant demand for infrastructure across the region. Developing Asia needs to invest USD26 trillion by 2030 to resolve its infrastructure gap , according to the Asian Development Bank.

Across the region, hundreds of billions of dollars need to be spent to expand telecommunication and broadband networks, water supply, power and transport systems. These investments are expected to push technology to the limits, given the increased focus on energy efficiency and promoting a cleaner environment. Think about all buses in China switching from oil to electric transmission, not to mention the introduction of self-driving cars, in the not-too-distant future; or solar power accounting for a greater share of India’s electricity grid; or hi-tech desalination plants helping Asia tackle a growing water deficit.

These possibilities will likely present investors with unprecedented opportunities to make long-term returns. If you add to this the fact that tech unicorns in Asia, which are not currently accessible to ordinary investors, could start to list their shares on regional exchanges in the coming months, the tech industry will likely continue to boom.

This is not research material and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. This commentary is provided for general information purposes only, it does not take into account the specific investment objectives or financial situation of any particular person or class of persons and it has not been prepared as investment advice for any such person(s). Further details can be found in these terms & conditions.

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Seizing China’s ‘new economy’ opportunity

Clive McDonnell — Tue, 23 Jan 2018 16:49:46 +0000

For international investors looking for the next big opportunity, China’s ‘new economy’ companies offer plenty.

In contrast to economies in Japan, Europe and to a lesser extent the US, new growth drivers in China have emerged in the technology, transportation and consumer services sectors. The marginal return on investment in these sectors is increasing and they do not have the same dependence on debt as companies in China’s old economy – such as manufacturing – sectors.

Big data is a big deal

If ‘big data’ generates competitive advantage for businesses in the first half of this century, China’s leading technology companies have a unique advantage. China’s vast population of 1.4 billion people are avid smartphone and social media users, giving these companies a huge stream of data to analyse – and use – to grow their business.

"China’s government understands the importance of creating new growth drivers"

This data will inevitably help China’s technology companies tailor-make new solutions for their customers, especially in the sharing economy. This is evident from the emergence of major app-based companies dedicated to cab-sharing, bike-sharing and online retailing over the past five years.

China’s government understands the importance of creating new growth drivers to take over from the old economy behemoths. It has approved foreign investment by China’s technology sector leaders, even as authorities clamped down against foreign investment by old-economy conglomerates, enabling them to access the latest know-how from abroad and help China rise up the technology ladder.

Belt and Road is the next big growth driver

China’s huge population provides the ‘new economy’ sector an attractive market to experiment new ideas and technology. However, the economy is also relatively protected, which some investors worry could result in the companies resting on their laurels.

Policymakers are very much aware of this.

China’s Belt and Road (B&R) initiative – which involves large-scale infrastructure development along China’s centuries-old trade routes across Asia, Africa, the Middle East and Europe – is part of the solution to ensure Chinese companies continue growing. B&R offers new opportunities and a road map to tap into millennial consumers across a much wider market. Chinese companies are taking advantage of this opportunity by gradually grabbing market share in the instant messaging, e-commerce and sharing economy across South and South-East Asia.

"There are a range of Chinese companies listed in the US, UK, Singapore and Hong Kong"

There is an opportunity for global investors here. During the 1990s growth spurt, international investors did not have easy access to rapidly growing companies in China’s finance, materials and energy sectors, as many were unlisted. Today, there are a broad range of Chinese companies in fast-growing technology, transportation and consumer services sectors which are listed in the US, UK, Singapore and Hong Kong. This has made them easily accessible to global investors, and those looking for some of the most exciting growth opportunities worldwide today should look no further than their nearest stock exchange.

The market correction that never happened

Steve Brice — Fri, 15 Dec 2017 13:29:07 +0000

The stock market has powered through several surprise geopolitical events – Brexit, President Trump’s election and heightened uncertainty around North Korea – seemingly without missing a beat.

Global equity markets haven’t had 5 per cent drawdown for more than a year and they haven’t suffered a 10 per cent correction since the start of 2016. The last time global equities avoided a drawdown greater than 5 per cent for over a year was between early 1995 and mid-1996.

Thus, this trend is quite unusual and an equity market correction is inevitable – the question is how do we prepare for it? To answer this question, we need to first understand the market drivers. The enduring equity market rally is being supported by three powerful forces – improving macroeconomic fundamentals, solid corporate earnings and abundant liquidity.

The driving forces

Starting with the macroeconomic backdrop: for the first time since the financial crisis, the world economy is seeing synchronised growth fuelled by both developed and emerging markets. This is a sea-change from the aftermath of the crisis, when initially the emerging markets, propelled by China’s unprecedented fiscal stimulus, and later the US, took turns to support global growth.

Over the past year, we have seen Europe, and increasingly Japan, joining in as global economic engines. Better still, the acceleration in global growth has been accompanied by weaker-than-expected inflation, creating the so-called ‘Goldilocks’ environment of moderate growth and low inflation, which is positive for risk taking.

"While risks could disrupt global equity market in the next one to three months, we do not believe they will derail the market’s bull run"

The favourable macroeconomic backdrop has filtered through to corporate profits. For instance, consensus estimates indicate the US, eurozone area, and China are all expected to report at least 10 per cent earnings growth this year and over the next 12 months, providing a fundamental support for equities.

And then there is the abundant global liquidity as a result of still-extremely accommodative monetary policies in most developed markets, including the US, despite the Federal reserve (Fed) raising interest rates.

Positive growth, but not without risk

So what could unsettle this constructive environment for equities? We believe there are two likely sources of near-term risk.

First, inflation expectations are likely to rise in the coming months. As inflation returns, more and more central banks are likely to withdraw the monetary accommodation that’s been in place following the global financial crisis. Expect it to be a gradual process that gives ample time for markets to digest with limited volatility. The process is likely to put gradual upward pressure on bond yields, making them increasingly competitive relative to expected returns from equities.

"We doubt that any equity market pullback, while overdue, will be deep or prolonged"

The second source of uncertainty are event risks, including increased tensions between the US and North Korea; the US debt ceiling debate and the Fed beginning to tighten its balance sheet; the European Central Bank starting to withdraw its ultra-loose monetary policy; and the US’ more confrontational approach on trade issues with China and Mexico.

Rally not easily derailed

While these risks could disrupt global equity market in the next one to three months, we do not believe they will derail the market’s bull run, which is now in its ninth year. The three powerful forces – macroeconomic fundamentals, corporate earnings and liquidity – will continue to provide a favourable environment for equities.

In fact, we doubt that any equity market pullback, while overdue, will be deep or prolonged. It would likely take a significant escalation of risk events to pull the markets sharply lower. In the absence of such extreme events, we believe that any pullback would provide an opportunity to add exposure to global equities.

Equity bull market still has room to run

Invisible author — Wed, 19 Jul 2017 08:00:46 +0000

In his latest outlook for markets, our Chief Investment Strategist, Steve Brice, gives his thoughts on:

Whether the ‘pivot to reflation’ will continue
The strength of equity markets
What his equity market outlook means for bond investors
US dollar stability

Want more from our wealth management experts? Take a look at their latest market outlook.

US fiscal stimulus delay is good for equities and bonds

Invisible author — Thu, 11 May 2017 09:30:38 +0000

Our Chief Investment Strategist, Steve Brice, and Director of Asset Allocation and Portfolio Services, Audrey Goh, discuss whether:

The US fiscal stimulus delay has changed their economic outlook
Geopolitical concerns have peaked
Bond yields are still expected to rise
Equity markets will weaken
The US dollar’s rise will continue

For more from our wealth management experts, read our latest market outlook.

Global equities: can the bull run continue?

Steve Brice — Fri, 05 May 2017 09:49:27 +0000

It has been more than five months since President Trump’s surprise election victory infused new life into the eight-year-long US equity bull market. Global markets have behaved as many, including us, anticipated: equities, riskier corporate bonds and industrial commodities rose, while government bonds fell.

But the Trump administration’s recent failures to implement several campaign pledges led to the first speed bump in this ‘reflation rally’, casting doubt on whether it can continue. Investors are now questioning President Trump’s ability to make progress on critical aspects of the reflation story – implementation of corporate and personal tax cuts, business deregulation and increased infrastructure spending.

""We believe the reflation rally can run for a while longer""

Steve Brice Chief Investment Strategist

We believe a US tax deal will be reached, but that this will take time, especially since the Republicans will be keen to ensure that there are revenue-boosting elements to any stimulus package. Therefore, while the US business cycle is in its late stages, we think the reflation rally can run for a while longer – and for reasons beyond the US.

Reflation is going global

The reflation theme seems to be broadening to other regions, with economic and corporate earnings growth estimates generally being revised higher, especially in Europe and Asia. Interestingly, the fiscal policy debate in Germany, which until now had led the euro area’s move towards greater austerity, also seems to be shifting back in favour of more easing. We are also seeing signs of a revival in Asian imports and exports, while Russia and Brazil are emerging from a couple of years of recession.

""Earnings growth expectations are robust and the pivot from economic ‘muddle-through’ to reflation suggests this is unlikely to change""

Steve Brice Chief Investment Strategist

This bodes well for the medium term (6-12 month) outlook for equity markets, and as a result, global equities remain our preferred asset class. Earnings growth expectations are robust and the pivot from economic ‘muddle-through’ to reflation suggests this is unlikely to change dramatically.

The euro area is our preferred equity market. Valuations are relatively low compared to the US, while 2017 earnings growth expectations have risen against the backdrop of an improving domestic economic outlook and reduced fears of a trade war.

Favourable valuations in Asia

We are also positive on the outlook for Asia (excluding Japan) equities. Economic data is improving and the US dollar’s stability should be a positive as it means domestic policy settings can remain loose and the region could benefit from a pick-up in foreign portfolio inflows.

Valuations are reasonable, earnings are expanding at a double-digit pace and the region remains under-owned by institutional investors. Within Asia, India and China (especially the ‘new economy’ sectors) remain our preferred markets.

Within bonds, there is a clear preference for corporate bonds over government bonds and, particularly, for areas of the market that have less sensitivity to rising interest rates. This is because developed-market government bond yields are likely to move gradually higher as the reflation story unfolds and the US Federal Reserve gradually removes its accommodating policy. This is why we currently favour US floating rate senior loans and developed market high-yield bonds.

""While we do not predict electoral success for Eurosceptic parties, there are risks of temporary market volatility""

Steve Brice Chief Investment Strategist

We are a little more cautious on Asian bonds. Issuers from China and Hong Kong have become increasingly dominant players in the Asian US dollar bond market. This exposes investors to higher concentration risks. Although China’s tightening capital controls and gradually rising interest rates have been successful in stemming outflows, any increase in concerns about China or reduced flows from Chinese investors could lead to sharp pullbacks in the market.

Cannot rule out short-term volatility

Of course, there are always risks of short-term weakness in equities and other riskier assets. While we do not predict electoral success for Eurosceptic parties, there are clearly risks of at least temporary market volatility as polls fluctuate. Also, some market indicators, such as implied volatility across different asset classes, do hint at investor complacency.

However, recent fund manager surveys show there is still significant cash sitting on the sidelines that has yet to be deployed into markets, which is usually an indication of further equity market upside.

Global markets: why sentiment is improving

Invisible author — Wed, 12 Apr 2017 10:35:51 +0000

Our Head of Asset Allocation and Portfolio Solutions, Aditya Monappa, and Chief Investment Strategist, Steve Brice, discuss the global economy’s prospects for growth and whether:

The equity market bull run will continue
The US dollar has peaked
France’s upcoming presidential election will affect the markets
Oil prices are still heading up
Bond allocations should still be positioned for higher yields

Want more on the markets? Read our latest outlook.

China equities: the bull market is back

Clive McDonnell — Thu, 06 Apr 2017 10:49:51 +0000

China’s equity markets have been on a wild ride in recent years. After peaking in 2015 to its highest level since 2007, the Hang Seng China Enterprises index plunged almost 50 per cent by February 2016. Since then, the bull market has returned, with the index rallying 37 per cent – and we believe this bull market can continue, for five reasons.

1) A more stable economy

China’s economy has stabilised after a number of years of fiscal, monetary and credit easing. Although growth has been on a secular downtrend since 2010, the government has a growth target for 2017 of ‘around’ 6.5 per cent. The stabilisation in economic activity – which is confirmed by the so-called ‘Li Keqiang’ index which tracks underlying economic indicators such as bank lending, rail freight movement and electricity consumption – has helped calm nerves, slowing down capital outflows in recent months. A resilient economy, combined with a broadly range-bound US dollar and official measures to restrict fund outflows, has helped stabilise the yuan.

2) Increased domestic liquidity

Beijing’s efforts to tighten capital controls have resulted in increased domestic liquidity. As capital can no longer flow as freely overseas, it is finding its way into domestic asset markets, including equity and real estate. Although administrative controls have tried to control the pace of property price appreciation, Shenzhen and Shanghai have witnessed more than 50 per cent and 20 per cent price gains respectively over the past 12 months. Moreover, the so-called ‘sell-through rate’ – percentage of housing units sold at project launch – has risen in recent months as buyers return to the market.

""New economy’ sector earnings are expected to grow 21 per cent this year, compared with 7 per cent growth in ‘old economy’ sectors such as energy, industrials and materials""

Clive McDonnell Head of Equity Investment Strategy

3) Rising corporate earnings expectations

The improvement in underlying economic activity is showing through in rising corporate earnings expectations. Consensus forecasts estimate a 16 per cent earnings growth for the MSCI China index for 2017, up from a contraction of 8 per cent in 2016.

While the main drivers of the earnings recovery centre on the telecom and consumer staples sectors, ‘new economy’ sectors such as technology, consumer discretionary and healthcare are the clear favourites. This is backed by strong earnings estimates – ‘new economy’ sector earnings are expected to grow 21 per cent this year, compared with 7 per cent growth in ‘old economy’ sectors such as energy, industrials and materials. Moreover, the technology sector dominates China’s equity markets, accounting for a 32 per cent share of the MSCI China index, making it a key driver of the overall market.

4) Inexpensive equity market

China’s equity market remains inexpensive relative to peers. The market is valued in line with its long-term average, but is cheaper than major market indices such as the S&P500 index.

5) Benefits of a stabilising US dollar

A stabilising US dollar should help attract foreign fund flows back to Asia, which is likely to benefit China, the largest market in the region. China’s policymakers are likely to prevent any significant yuan depreciation as they tighten controls to limit capital outflows. This may contribute to continued excess liquidity in the domestic economy, buoying asset markets including equities.

""China’s equity bull market has longer to run""

Clive McDonnell Head of Equity Investment Strategy

Investors in China’s equity markets have had a rocky ride in recent years. Some risks have not gone away, including elevated debt levels at companies and the possibility of a stronger US dollar and weaker yuan as the US Federal Reserve accelerates the pace of rate hikes. Another risk is President Trump enacting punitive trade policies against major exporters such as China. Any of these factors could raise the risk of a sharp deterioration in China’s economic growth.

However, we see a low probability of such an outcome. For now, the combination of China’s policy-led stabilisation in economic growth, strong earnings growth driven by consumption-led new economy sectors, attractive valuations and ‘trapped liquidity’ as a result of tighter capital controls give us confidence that the equity bull market has longer to run.

Fintech and millennials – the next investment revolution

Alexis Calla — Tue, 14 Mar 2017 17:26:10 +0000

As wealth changes hands to a new generation of socially engaged millennials in the coming years, the social, responsible and impact (SRI) investment space is set to see significant inflows.

With 91 per cent of millennials interested in sustainable investing, our experts predict that rising millennial wealth could drive SRI investment to USD400 billion by 2020, up from USD77 billion today – and fintech is why.

According to Innovation in Investment, the first in a series of reports we have developed in partnership with the Economist Intelligence Unit, fintech could help make green and impact investment mainstream, with millennials leading the change.

Fintech solutions will make it simpler for tech-savvy millennials to access SRI investments, effectively expanding the borders of an investment space that until recently has been limited to institutional investors such as hedge funds.

No compromise on financial returns

At a recent seminar for our Private Banking clients, a panel of experts pointed to growing evidence that creating social impact does not mean compromising on financial returns. This is helping to make SRI investment more popular.

Two leaders in impact investing – Asia-focused private equity firm Bamboo Capital and the International Finance Corporation (IFC) – invest to meet targets for both development impact and financial returns, and have consistently reported competitive investment yields.

"SRI investments give socially conscious millennials a chance to invest in sectors and areas that matter to them"

At our seminar, Adam Sack, head of IFC’s Emerging Asia Fund, highlighted that since 2000, the fund’s 380 equity investments have delivered realised returns of 26.7 per cent per annum. For context, this is in the top quartile of traditional private equity returns.

SRI investments give socially conscious millennials a chance to invest in sectors and areas that matter to them, forging a personal connection that goes beyond conventional financial returns.

How investors can negotiate the Trump factor

Manpreet Gill — Wed, 08 Mar 2017 12:32:51 +0000

The first few weeks of the new US administration have made one issue quite clear – President Trump is keen to deliver on his campaign promises. One of the cornerstones of his declared policy is to negotiate better trade deals for the US with its neighbours, as well as with key trade partners in Asia.

Where does that leave trade-dependent Asia and other emerging markets, many of which count the US among their top three trading partners? And how should investors play the emerging trend? There are a few factors favouring emerging markets at the moment that arguably contributed to their equities outperforming those of developed markets for the first time in four years in 2016:

Emerging-market growth is accelerating relative to developed market growth for the first time since 2009
Emerging-market equity market valuations are more attractive than those in developed markets after years of underperformance
Many emerging markets, especially outside Asia, are still recovering from recessions and/or downturns in equity, bond and currency markets
Many emerging markets are benefitting from increased commodity price stability, greater reform efforts and stability in China

Against these favourable trends, there are counter-balancing factors. Apart from trade frictions, the most significant risk facing Asia and emerging markets is rising interest rates in the US, as Trump’s policies could potentially generate faster growth and higher inflation. Historically, higher US rates have tended to create a challenging environment for emerging markets, given the possibility of triggering capital outflows.

Capital outflows are not inevitable

However, we believe capital outflows are not inevitable. There are three factors to keep in mind. First, that many emerging markets have already faced significant capital outflows, suggesting the most susceptible components may already have left. Second, the gap between low US rates and fairly high rates in many emerging markets is quite high. Finally, US interest rates would probably have to rise at a faster pace than expected in order to trigger large-scale capital outflows, and markets are arguably already looking for at least two rate hikes from the Federal Reserve (Fed) this year.

There could even be situations where US rates go up, but are not detrimental to emerging markets. For example, US interest rates could rise, but at a much slower pace than expected; or emerging market growth could continue to accelerate relative to developed market growth.

Take a selective approach

Investors should be highly selective. The US remains our preferred equity market given its strong earnings outlook. Within Asia, India appears most attractive, given its domestic focus (a partial shield against trade frictions), positive long-term structural growth outlook and falling interest rates.

Hong Kong and China equities have delivered solid performances year-to-date as weakness in the US dollar helped emerging market equities generally. Chinese banks, with their cheap valuation and high dividend yield, should be an area of focus for local investors. Elsewhere, China ‘new economy’ stocks are likely to do well.

"The Chinese yuan is likely to continue to weaken gradually, along with modest broad-based gains in the US dollar"

Within bonds, prospects of higher Fed interest rates and inflation warrant a shift away from higher-grade government and corporate debt to less rate-sensitive developed market high-yield corporate bonds and US floating rate loans. In Asia, we believe a focus on higher-quality Asian US dollar corporate bonds is prudent, given the risks around deteriorating credit quality. Within currencies, the Chinese yuan is likely to continue to weaken gradually, along with modest broad-based gains in the US dollar.

It is currently unclear if President Trump can deliver what he promised. A lot depends on whether he can cut deals with his fellow Republicans and how successfully he fends off Democrat opposition to implement tax cuts, deregulation and increased spending on US infrastructure.

For investors, the prospect of Trump’s trade protectionism policy remains a big unknown, as many export-oriented emerging markets could suffer. Regardless of how the risk factors turn out, investment opportunities do exist in this politically uncertain environment.