There’s been a sizeable rotation in equity markets along with a sell-off in bonds. Bond-like equities, which benefitted most from lower discount rates, have fallen. The most speculative, Covid-bolstered, technological and crowded end of the market has been hit the hardest.
Markets now seem reminiscent of where they were before the pandemic. The difference today is there is considerably more corporate debt, public finances have been traduced and market valuations are broadly higher. Policy-wise, we think there is likely to be a broader shift to more government intervention in markets, alongside higher taxation and greater regulation.
Against this backdrop, many investors are considering how to position their Asia Pacific portfolios for the post-pandemic world.
Long-term structural themes are bolstering certain sectors
It is important to look at the powerful structural themes that support underlying businesses, such as a growing middle class, rising consumption, an ageing population, better healthcare and technological disruption.
Asia Pacific companies in the consumer staples sector, which includes food, beverages, household and personal products, and in consumer discretionary, such as cars, apparel and retailers, are set to benefit most from these trends. Industrial companies driven by consumer spending, such as home improvements, air conditioning and tourism, along with IT-platform businesses, are also seeing increasing demand driven by the rising wealth of Asian consumers and the larger middle class.
Tech companies that manufacture and supply global multinationals with components and services are benefitting from the rise in smart technology and automation, while IT services companies – typically multinational firms based in India – are, quite simply, digitising the world. The pandemic has given them multiple additional tailwinds, and they are collectively very high-quality companies, with high returns, strong cash flow and, typically, net cash balance sheets.
Leading Asian financial companies, particularly Indian private banks, are also expected to perform well over the longer term. They are often high return-on-equity compounding businesses with substantial growth potential, and Covid has strengthened their competitive position.
Which characteristics make companies more resilient during crises?
Although past crises may have different causes – the global financial crisis and the Asian financial crisis were both caused by excessive debt, while the Sars and Covid crises were health-related – there was a similar knock-on effect on consumption and economic growth for each.
As markets oscillate between pessimism and euphoria, the best way to deal with an unpredictable future is to simply focus on buying high-quality companies. The best companies will prosper in easier times and suffer the least during adversity. One of the most obvious markers of a quality company over the long term are a high return-on-equity, alongside a reasonable growth rate that’s achieved in a relatively foreseeable and sustainable fashion. Businesses in sectors such as consumer staples, rather than capital goods, are also much more predictable.
People (and the management team in particular) are the primary ingredient that makes great franchises and drives returns. Additionally, those companies that treat their staff well, pay their taxes and behave properly do better – and are more sustainable – than those that do not.
When the market-tide goes out, as with the Covid market response, it is much easier to avoid excessive pessimism if investors own high-quality, reasonably valued and well-capitalised businesses. The hardest part is the essential discipline to do nothing, other than to consider the bargains being offered by the market. It is clearly much easier to do this from a position of strength and resilience.
Richard Jones is a director focused on Asia Pacific equities at FSSA Investment Managers