The 6 trends to watch across Asia-Pacific and abrdn’s top stocks for each

If equity valuations are anything to go by, Asia is looking attractive right now. The MSCI All Countries Asia Pacific ex Japan (MXAPJ) Index is trading at 14.7x PE, compared to 20.2x for the S&P 500. Dividends in the benchmark have also been steadily growing, with analysts expecting 6.7% in dividend growth in 2024, led by consumer services, insurance and staples.

But it’s not just valuations that have caught abdrn’s Head of Asia Pacific Equities, Flavia Cheong’s eyes.

Cheong sees 6 major structural themes creating enormous opportunities for investment across the region – and there are a number of stocks across each that she likes.

In this interview, she also explores the outlook for China and India.

The outlook for Asia’s biggest economies

When you discuss the Asia-Pacific region, it’s hard to understate the importance of the two biggest economies in the region – China and India.

China has had a challenging year, in contradiction to the high hopes that global markets had for its reopening late last year. But Cheong believes it is starting to look more promising.

“Macroeconomic indicators, such as Q3 GDP, factory activity and services, are giving some encouraging signals that the targeted policy support may be starting to bear fruit,” she says.

Cheong also points to efforts to bolster the struggling real estate sector through supply-side and demand-side policies, such as the easing of buying restrictions in Tier 1 cities. She still anticipates more easing measures and investors should pay attention to the Central Economic Work Conference in mid-December.

The muted recovery has also created opportunities for investors.

“Valuations for some very strong business franchises are operating at extremely deflated multiples despite resilient earnings and strong fundamentals, which make them compelling for active investors,” Cheong says.

India on the other hand is on a roll, one of the fastest-growing major economies in the world today.

Cheong views this growth as underpinned by 5 factors:

• A property sector in the early stages of a renewed up-cycle.
• The banking sector has the strongest balance sheets it has had in over a decade.
• Government spending on infrastructure.
• Positive and rising consumer sentiment.
• Relative geopolitical stability with bilateral and multilateral ties.

India is also benefiting from a post-COVID trend for corporations seeking to diversify their supply chains away from dependence on China – this has also been supported by government policy of attractive corporate tax rates and production-linked incentive schemes.

“All this is helping to sustain attractive earnings growth and a recovery in return on equity,” says Cheong.

Though she sees some risks, such as India’s vulnerability to high energy prices, she believes it is managing it well to date.

Readers won’t be surprised to see a number of Chinese and Indian listed companies feature in Cheong’s top picks for the six major themes.

abrdn’s 6 investment themes

Some of the biggest global megatrends are of course influencing activity and key themes within the Asia Pacific.

For example, the growth of the middle class in Asia has significant implications for global corporations, let alone the Asia-Pacific itself. It’s estimated that by 2030, 3.5 billion Asians could be classified as middle-class (compared to 2 billion in 2020), representing around 2/3 of the world’s middle-class citizens.

Similarly, the green transition is a significant driver of global spending and activity. The International Renewable Energy Agency suggests yearly investments need to reach US$35 trillion by 2030 for the transition to be successful.

And this is all before we consider the extraordinary pace of change in technological innovation. There’s a reason of course why artificial intelligence fuelled a resurgence of tech stocks earlier this year.

abrdn has identified 6 structural themes across the Asia-Pacific region – all of which, unsurprisingly are supported by the global mega-trends. Cheong notes that the most attractive investment opportunities have also fallen under these themes.

1. Aspiration

“Rising affluence in Asia is leading to fast growth in premium consumption in areas including personal care products, financial services and food and beverages,” says Cheong.

Some stocks she likes in this space include leading hard liquor producer Kweichow Moutai (SHA: 600519), China’s largest duty-free operator China Tourism Duty Free Group (SHA: 601888) and Hindustan Unilever (NSE: HINDUNILVR), India’s largest fast-moving consumer goods (FMCG) company.

2. Building Asia

“Urbanisation and an infrastructure boom is set to benefit property developers and mortgage providers among others,” Cheong says.

Companies she likes in this space include developer and mall operator China Resources Land (HKG: 1109) which Cheong believes is well positioned for a turnaround in sentiment and also benefits from a portfolio of investment properties. Also, Indian real estate company Godrej Properties (NSE: GODREJPROP) which Cheong believes is at an inflection point with improving fundamentals.

3. Digital future

“Growing integration amid the widespread adoption of technology means a bright future for plays on gaming, internet, fintech and tech services like the cloud,” she says.

Internet giant Tencent (HKG: 0700) is Cheong’s pick and she notes there is “tremendous potential in Tencent’s advertising business as it starts monetising its social media and payment platforms.

4. Going green

There’s enormous public and private spending fuelling the green transition.

“Plays on renewable energy, batteries, electric vehicles, related infrastructure and environmental management all have a bright future. Grid parity will be game-changing,” says Cheong.

Her picks in this space include Nari Technology (SHA: 600406) which is a supplier of power grid automation and industrial control products in China and Contemporary Amperex Technology (SHE: 300750) which is a leader in the battery and energy storage system space.

5. Health & wellness

Both a growing middle class and an aging population have obvious interests in spending on health and wellness. Cheong notes the abrdn holdings include plays on contract research, vaccinations, pharmaceuticals and diagnostic products.

Cheong nominates Australian healthcare darling CSL (ASX: CSL) as one of her picks in this space.

“The company enjoys superior growth and returns because of its highly efficient collection and processing system, coupled with its commitment to research and development,” she says.

She also lists Chinese medical equipment maker Shenzhen Mindray (SHE: 300760), highlighting that “the company is positioned as a premium player with high-quality products reflecting their heavy focus on R&D, but priced significantly cheaper than global peers.”

6. Tech enablers

Those companies able to support the roll-out of 5G, big data and digital interconnectivity are well positioned for growth in the coming years. 

There are three key companies that Cheong tips in this space: the world’s largest pure-play semiconductor manufacturer Taiwan Semiconductor Manufacturing (TPE: 2330), a leader in memory chips as well as a player in the smartphone and display panel space Samsung Electronics (KRX: 005930) and Dutch company ASML Holding (NASDAQ: ASML) which creates lithography equipment crucial to making semiconductor chips smaller, faster and greener.

Bright spots in challenging times

At a point in time where we continue to see slowing global growth and the increased likelihood of a US recession in mid-2024, Asia is looking promising. It is also capitalising on some of the biggest trends of our times. 

With valuations looking attractive, perhaps it’s time for investors to be taking a closer look. In any case, it’s tapping into some of the most exciting themes on offer.

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