Asia: a new era of growth

The global economy has reached a crucial inflection point. After nearly a decade of stagnation and contraction, the world has entered a new era of ‘reflation’ – a return to economic growth.

A meaningful pick-up in global economic activities can prove beneficial to emerging markets, especially Asia.

This means looking forward to a brighter outlook in Asia and understanding the impact on your investment strategy and portfolio.

Adapting your portfolio to new opportunities

The return of reflation in a steady growth environment means you should consider adapting your portfolio.

Obviously, the key focus should be on those assets which do better in reflationary periods such as equities - particularly emerging markets equities and Asian equities, or sectors which benefit from growth theme.

For income, favour shorter-duration bonds given their lower sensitivity to rising rates, credit, and inflation-linked securities.

You might also consider high-dividend-paying stocks to generate income, as well as high-yielding debt, such as Asian corporate or emerging-market sovereign bonds.

The return of reflation and steady economic growth is good news in many ways. But it also means reimagining your investment strategy, diversifying, and hunting further afield for both growth and income.

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Finding Growth in a Reflationary World

The return of reflation provides investors with a range of opportunities to access growth areas of the markets. Risk assets, such as equities, often perform well in such an environment, particularly emerging markets and those which are exposed to cyclical trends. By increasing their allocation to the right asset class, investors can benefit from the continuing upward trajectory of economic growth.

What's growing, Where?

While economic growth may be more widespread globally, Asia’s economies will stand out.

Asia is experiencing growth across the board and Asian fundamentals are the best they have been for five years. We see resilient dynamics for the region through Asia’s exposure to global growth and positive economic indicators locally.

Asia’s leading companies will be the main beneficiaries of rising demand for everything from e-commerce to infrastructure. We have also seen meaningful earnings growth across the region. This is placing Asia in a much more attractive position than it has been for some time.

The broadly positive economic backdrop and outlook for the region’s businesses will create significant investment opportunities. Globally, the balance of growth is shifting, and it is natural that investment strategies should move to match.

Asia benefits from technology and leads the world in digital commerce

Share of global spending on digital commerce

Share of global spending on digital commerce
Source: McKinsey Global Payments 2016

Which sectors to watch

As growth takes hold, cyclical sectors -- industries in which revenues tend to move in line with economic cycles -- should see a revival.

Mining

A number of factors are set to drive long-term demand for resources, not least urbanisation and massive demand for infrastructure in emerging markets, particularly Asia. At the same time, the collapse of the last resources boom has encouraged miners to focus on cost discipline, and technology is helping the industry achieve new levels of automation and efficiency.

Asia will account for 50 percent of the 2.4 billion people added to the world’s urban population by 2050

Growth in urban population, 2015-2050, thousands 

Growth in urban population, 2015-2050

Source: UN World urbanisation Prospects, 2014
For illustrative purpose only. There is no guarantee that any forecasts made will come to pass.

Financials

Banks and insurers are at long last emerging from the shadow of the 2008 global financial crisis. The policy environment is improving, with regulatory pressures easing in some key markets. Furthermore, the return of economic growth is likely to prompt central banks globally to raise interest rates, which will translate into higher loan profitability for banks. Financial firms are also benefiting from global economic growth recovery, notably in Asia, where a fast-growing population of high-net-worth clients, as well as robust trade and investment prospects, mean surging demand for a range of financial services.

 


Trust in BlackRock to Uncover Asia’s Best Opportunities

The return of reflation and economic growth brings enormous opportunities to Asia. You need an investment team that can navigate the complexity of the Asia landscape, while having the ability to identify and seize the right investment opportunities that are emerging.

BlackRock is well-placed to deliver world-class investment solutions ideal for today’s reflationary environment, with the aim to meet your investing needs. We can offer you

Highly experienced and award winning* Asian investment teams

Highly experienced and
award winning* Asian investment teams

Best-in-class investment technology platform

Best-in-class investment technology platform

Comprehensive world-class investment solutions

Comprehensive world-class investment solutions

Think Asia. Think BlackRock.

*Source: Benchmark Fund of the Year Awards 2016 – Best in Class Asia ex-Japan Equity and Best in Class Asian Fixed Income. The Benchmark Fund of the Year Awards 2016 reflect the funds’ performance between 1 October 2015 and 30 September 2016.Think Asia. Think BlackRock.

 

Finding Income in a Reflationary World

Reflation is generally good for investors, but it can create challenges for income-generating assets, particularly as inflation emerges. As income can be harder to come by you will have to look further afield. The good news is that Asia has some of the best income-producing opportunities, both in equities and fixed-income.

Favour dividend growers

Equities generally win during periods of reflation. But some stocks perform better than others. Income-producing equities not only deliver income but can be a significant growth driver for your portfolio. Their higher income – along with price appreciation -- boosts overall returns, serving as a natural buffer against inflation.

Total returns (%) with dividends reinvested since 2000

Total returns (%) with dividends reinvested since 2000

Source: CLSA, April 2017

But investors should go one step further and specifically favour ‘dividend growers’; stocks which boast a clear track record of steadily rising payouts, and the capacity to continue to raise dividends over time .

Attractive Asian equity opportunities

Fortunately, Asia is home to many dividend growers. These are typically well-established firms with strong balance sheets, steady free cash flows and rising revenue. That description applies to many Asian companies in cyclical industries such as financial services. Their sound financial health also means they’re generally more resilient to rising rates and market volatility.

The fixed income challenge

But the major challenge for income investors during reflation is fixed income.

During reflation, bond prices fall as investors’ risk appetites rise and shift to equities. While this pushes up bond yields, higher inflation often can offsets those yield gains, causing real returns to fall.

But don’t shun bonds totally. Instead, diversify your approach. Emerging market sovereign bonds and high yield corporate debt both offer investors opportunities to achieve attractive income levels in an inflation-prone environment.

3-year return history of major credit asset classes

3Y return history of major credit asset classes

Source: Bloomberg, BlackRock, June 2017. Index levels are rebased to 100. Asian Credit: JPM Asian Credit Index; Global IG Corp: Barclays Global Corporates (USD Hedged); EM Credit: JPMorgan Emerging Market Bond Global Diversified Index; Global HY Corp: Barclays High Yield Corporates (USD Hedged). Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

Asian fixed income opportunities

Again, like equities, Asian companies offer a good hunting ground for corporate debt. Many Asian companies are well managed and have relatively low default rates.

Supply and demand dynamics are also favourable. While gross supply remains strong, this is offset by the increasing number of maturing bonds. The limited net supply will be in high demand from investors.

Reflation resilience

Reflation is a virtuous cycle and can create challenges for income investors. But by diversifying across different income-producing solutions, investors can find investments that generate solid income and provide protection against the impact of inflation.

 


Trust in BlackRock to Uncover Asia’s Best Opportunities

The return of reflation and economic growth brings enormous opportunities to Asia. You need an investment team that can navigate the complexity of the Asia landscape, while having the ability to identify and seize the right investment opportunities that are emerging.

BlackRock is well-placed to deliver world-class investment solutions ideal for today’s reflationary environment, with the aim to meet your investing needs. We can offer you

Highly experienced and award winning* Asian investment teams

Highly experienced and
award winning* Asian investment teams

Best-in-class investment technology platform

Best-in-class investment technology platform

Comprehensive world-class investment solutions

Comprehensive world-class investment solutions

Think Asia. Think BlackRock.

*Source: Benchmark Fund of the Year Awards 2016 – Best in Class Asia ex-Japan Equity and Best in Class Asian Fixed Income. The Benchmark Fund of the Year Awards 2016 reflect the funds’ performance between 1 October 2015 and 30 September 2016.Think Asia. Think BlackRock.