Active is: Accessing Asia’s potential

Rise of Asia is powered by millennials, tech and reform

by Neil Dwane | 31/05/2019
Chinese Business People


Our Asia investment experts and European clients recently met in Berlin for our 11th annual Asia Conference. We think the world’s most dynamic region holds fundamental attractiveness for investors – even amid current trade tensions.

Key takeaways

  • Asia’s millennials – urban, ambitious and tech-savvy – have grown up and are transforming the region’s economy, and foreign corporations are attracted to Asia’s increasingly educated and skilled workforce
  • News headlines are full of threats to global trade, but Asia’s regional trade policy is pragmatic and will rely increasingly less on exports to US consumers
  • Despite understandable concerns about ESG issues, global investors seem too cautious on Asia, where valuations are cheap, earnings are resilient and ESG standards are improving
  • Asia’s bright outlook should lead more investors on the hunt for income to consider higher-yielding Asian and emerging-market bonds

As long-term investors, we think the engine powering global growth in the coming decades will be Asia and its large, growing consumer and services markets. Developed economies are ageing and facing unsustainable social-services commitments, and their business models largely depend on high levels of debt and easy money from central banks. While significantly less wealthy, Asia has a youthful population of nearly 4.5 billion and a growing desire to reduce its dependence on the West – which gives Asia an important strategic resonance for investors.

More immediately, despite the 2019 bounce-back in Asian stockmarkets, Asian equities still appear attractively valued. Last year’s bout of underperformance appears largely driven by trade concerns, but corporate fundamentals and earnings are attractive, and corporate-debt levels are lower in Asia than in many developed markets. We also find that Asian and other emerging-market bonds offer a compelling long-term story for investors on the hunt for income, with cumulative total returns that are particularly attractive compared with low- or negative-yielding European bonds.

So with Asia set to power global economic growth in the coming decades, here are the key themes investors should watch.

Trade and politics are inextricably linked

Under President Donald Trump, the United States is aggressively renegotiating many long-standing global agreements – including withdrawing from the Trans-Pacific Partnership (TPP), pushing back on South Korea and Japan over military spending, and imposing new trade terms on China. The US has also fired the opening salvos in a US-China “tech cold war”.

These conflicts are creating economic uncertainty around the world, but they may end up benefiting Asian nations as they build up long-term alliances with one another. For example, if continued political pressure ramps up the tech cold war, Asian countries could side with China and become part of its tech ecosystem. At the same time, this would likely disrupt the consumer markets and supply chains of many established global tech companies, hurting their profit margins and underscoring the need for investors to be active and selective in this space.

Asia will resolve key political questions this year, with India, Indonesia, Australia and Japan holding important elections. Thailand and Malaysia are also facing their own internal struggles. But there is evidence to make us think that many Asian countries – particularly India, Indonesia and China, which are already reform-minded – will continue to move in the direction of reform and transparency.

China should increasingly be viewed as an asset class

For several years, we’ve advised our clients that it’s no longer a question of whether to allocate to China – but how much. Beyond having the world’s second-largest economy, China’s financial markets are large and deep, and the country is opening up to global investors. There are certainly legitimate concerns about the potential for prolonged trade wars, and about the environmental, social and governance (ESG) factors that many Chinese companies are struggling with but improving slowly. These issues reinforce the importance of conducting in-depth research and taking an active, selective approach to this market.

Overall, Chinese equities and bonds are under-owned and seem undervalued, especially given China’s focus on stabilising growth while reducing bad lending practices. We expect concerns over China’s debt levels and currency to fade, bringing more investment into Chinese bond and credit markets and providing the country with the capital it will need in the coming years.

China has completely transformed its economy in a matter of decades

Key indicators China in 1978 China today
% of global GDP 1.8% 15.2%
GDP per capita USD 156 USD 8,823
Poverty rate 97.5% 3.1%
Economic pillar Agriculture & industry:
75% of GDP
52% of GDP
State vs private No private sector Private sector 60%+ GDP
Financial markets No stock exchanges or
bond market
Second-largest global
stock market

Source: World Bank Database, Xinhua Net, Allianz Global Investors. Data as at 2018.

India’s reforms could be transformational

India is still building new foundations for future economic growth, drawing on its rich heritage of diverse cultures and the huge demographic advantages of its young population. Yet not many companies have been able to tap India’s vast consumer potential, so identifying those successful firms could be a big opportunity for investors. India is also attempting to implement broad-based reforms, focusing on improving openness, reducing corruption and improving social services. The biometrics-based identification system called Aadhaar is a great example of the government’s efforts. We expect to see further reforms enacted in the coming years – perhaps to the state-owned banks and their bad debts.

A growing focus on ESG issues

How do you battle the blight of plastic to save one of nature’s most beautiful landscapes? That was the question addressed by Melati Wijsen, the keynote speaker of our 2019 Asia Conference.

With many of our clients – and the asset-management industry overall – increasingly focused on ESG investing, we invited this 18-year-old activist to tell us about the “Bye Bye Plastic Bags” project, which she and her younger sister started in 2013 in Bali. Since then, BBPB has become a truly global initiative. And thanks to Ms Wijsen’s six-year campaign challenging the status quo, Bali has now banned all plastic bags – but this may be just the beginning. As she told the conference, the youth of today are 25% of the world’s population and 100% of the future.

Millennials are set to remake Asia

Around the world, baby-boomers are ageing out of the workforce and millennials are taking over. Nowhere is this more evident than in Asia, where significant demographic shifts are underway. The traditional model of big families in rural areas supporting themselves with physical labour is giving way to the era of urban, educated, ambitious individuals who are increasingly tech-savvy. This dynamic makes Asia a go-to investment opportunity for regional and global companies, who can pick from a field of talented STEM (science, technology, engineering and mathematics) graduates while tapping large consumer markets. But Asia’s generational transformation is not without its challenges: for example, policymakers must now think of new ways to provide India’s elderly with social services while not overly burdening its youth.

Technology is at the core of Asia’s rise

Compared with its older Western counterparts, the younger Asia has found it much easier to build high-tech infrastructure that embraces innovation. This has helped the region adopt disruptive new technologies and apply them beyond the tech sector – including health care, finance and telecom. Grassroots® Research – our proprietary in-house research division – has identified a large demand for new medical services built around unstaffed, AI-powered walk-in clinics. Ideas like these could help Asia leapfrog some of the developmental stages of more advanced economies, allowing the region to become even more competitive, more accessible and faster-growing.

Grassroots® Research is a division of Allianz Global Investors that commissions investigative market research for asset-management professionals. Research data used to generate Grassroots® Research reports are received from independent, third-party contractors who supply research that, as far as permissible by applicable laws and regulations, may be paid for by commissions generated by trades executed on behalf of clients.


Active is: Anticipating what’s ahead

The ECB is a long way from normalising monetary policy

by Franck Dixmier | 03/06/2019
ECB monetary policy


Continued uncertainty means the ECB continues to put the normalisation of its monetary policy on hold. Any rate hikes remain a long way off, but the 6 June meeting will see the Bank present revised economic forecasts in light of the current low inflation environment.

Key takeaways

  • The European Central Bank (ECB) has entered a pause in its monetary policy normalisation, prompted by the uncertain economic outlook, a high-risk environment and a sharp fall in inflation expectations.
  • In this context, we do not expect any rate increases in 2019 or 2020.
  • The ECB must provide answers regarding the drop in inflation expectations, which have fallen to historically low levels.
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