Key themes

2022 Market Outlook

Continuous disruption

Megatrends are continually shaping the global operating environment and impacting the way we work, live and play. Although these trends can be disruptive, they present possibilities to invest in new areas. We highlight a few that will offer new investment opportunities in the decades ahead.

Megatrends are large-scale shifts that will have a deep and long-lasting impact on businesses and societies. Understanding how these transformative trends will impact companies operating in many sectors will be crucial for investors who wish to be part of the new investment narrative. 

Investing in megatrends

Climate change, renewable energy, and carbon neutrality - Understanding China’s goal of reaching peak emissions by 2030 and net carbon neutrality by 2060 has given us insights into the environmental impact of energy consumption and strengthened our conviction to invest in selected electric vehicle (EV) companies and upstream suppliers (e.g. the separators in lithium ion batteries) in the EV supply chain.  

We believe that Taiwan’s well-established semiconductor eco-system stands to benefit from the rising demand for EV globally. EV-related demand would drive advanced semiconductor consumption over the next five years, which should benefit leading Taiwanese foundries and Integrated Circuit design houses. 

The increased demand for semiconductors will also benefit companies that produce related components such as advanced IC substrates (ABF or Anjiomoto Build-up Film), which provide electrical insulation of complex circuits for high-performance central processing units.

Changing demographics – Asia is on track in the next few decades to become one of the oldest regions in the world as its elderly population is projected to reach nearly 923 million by the middle of this century1. Still, there are pockets in the region that continue to enjoy attractive demographic dividends; Vietnam is one such example with a median age of 32.5 years.2

At the same time, there is an estimated 2 billion Asians who are members of the middle-income class in 2020 and that number is set to increase to 3.5 billion by 2030. In comparison, the size of the middle-income class in the Americas and Europe is stagnating3. The rising middle-income class has been a boon for countries such as Vietnam where economic growth is now no longer largely dependent on agriculture but led by services and industrial activity, supported by the young population.

Asia’s middle-income class is set to grow (Share of the global middle class by region)

2022-market-outlook-asias-middle-income-class

Asia’s changing demographics and growing middle-income population will impact consumption trends. Growing trends such as digitalisation and sustainability are likely to be embraced and adopted. This in turn offers new investment opportunities in financial services, healthcare, consumer goods and green products.

Digitalisation and increased automation – In a recent survey4, digitalisation was seen as key in helping ASEAN businesses cope during the pandemic and key in the region’s economic recovery going forward. 87% of the micro, small and medium enterprises surveyed indicated that digitalisation automated production processes and helped save time, provided easy access to information, and more options to select goods and services. Digitalisation also provided alternative sources of income during the pandemic.

Financial services is an area that has seen significant advancements from digitalisation. Digital banking and the proliferation of electronic payment wallets have facilitated digital remittance, online investments, and e-commerce activities. In Vietnam, top commercial banks are observed to spend 20%-70% of their capex on digitalisation. According to a Fintech and Digital Banking report5, Asia Pacific is expected to see 100 new financial institutions by 2025.

Understanding how technology is evolving through innovations such as 5G, cloud computing, and machine learning and how businesses are adapting their business models have also helped us unearth disruptive investments in the software, e-commerce, and internet sectors.

Cryptocurrencies – The future investment potential of cryptocurrencies continues to be a hotly debated topic. Enthusiasts have drawn parallels to gold while skeptics have dismissed it as a fad. Although there appears to be a longer-term potential for this asset, we believe it is still a little early to incorporate it into portfolios to seek diversification benefits. 

While gold has clearly been shown to support portfolio performances in periods when a balanced (equity -bond mix) portfolio may be suffering, the sample size is far too limited to draw any firm conclusions for cryptos. Another challenge is to find an appropriate (risk-managed) way to access this space.  

Investment implications

While investors need to be aware of near-term drivers such as inflation, interest rates and GDP growth which may impact the investment outlook, it is important to have exposure to disruptive megatrends that will have significant long-term global implications. When investing in megatrends, investors need to pay attention to the commerciality and sustainability of new business models and the ability of management teams to execute.  As some of these nascent businesses are still evolving, investors need to keep track of developments and understand both the opportunities and the risks involved.  

One of the biggest risks for new technological breakthroughs and emerging businesses is potential changes in the regulatory landscape and increased government intervention. Finally, even for highly attractive and disruptive megatrends, investors need to constantly take a sanity check to ensure that market valuations have not been extrapolated beyond levels of plausible reality.

Contributors:

John Tsai, Head of Growth Equities, Eastspring Singapore
Kelvin Blacklock, Head of Eastspring Portfolio Advisors, Eastspring Singapore
Taiwan Domestic Equity team, Eastspring Taiwan

For Use with Professional Clients / Qualified Investors Only. Not Approved for Further Distribution or Use with the General Public.

ARTICLE EQUITY ESG FIXED INCOME MULTI ASSET OUTLOOK

Sources:
1 https://data.adb.org/story/population-and-aging-asia-growing-elderly-population
2 World Bank – Vietnam country overview, updated 7 Apr 2021.
3 https://www.weforum.org/agenda/2020/07/the-rise-of-the-asian-middle-class. The middle class is defined as household with incomes of $10 to $100 per day and capita, taking into account purchasing power.
4 https://www.straitstimes.com/asia/increasing-digitalisation-the-way-to-recovery-in-a-protracted-covid-19-crisis-wef-asean-poll
5 Backbase, a company that offers digital banking platform, and the International Data Corp. (IDC)

The information and views expressed herein do not constitute an offer or solicitation to deal in shares of any securities or financial instruments and it is not intended for distribution or use by anyone or entity located in any jurisdiction where such distribution would be unlawful or prohibited. The information does not constitute investment advice or an offer to provide investment advisory or investment management service or the solicitation of an offer to provide investment advisory or investment management services in any jurisdiction in which an offer or solicitation would be unlawful under the securities laws of that jurisdiction.


Past performance and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the strategies managed by Eastspring Investments. An investment is subject to investment risks, including the possible loss of the principal amount invested. Where an investment is denominated in another currency, exchange rates may have an adverse effect on the value price or income of that investment. Furthermore, exposure to a single country market, specific portfolio composition or management techniques may potentially increase volatility.


Any securities mentioned are included for illustration purposes only. It should not be considered a recommendation to purchase or sell such securities. There is no assurance that any security discussed herein will remain in the portfolio at the time you receive this document or that security sold has not been repurchased.


The information provided herein is believed to be reliable at time of publication and based on matters as they exist as of the date of preparation of this report and not as of any future date. Eastspring Investments undertakes no (and disclaims any) obligation to update, modify or amend this document or to otherwise notify you in the event that any matter stated in the materials, or any opinion, projection, forecast or estimate set forth in the document, changes or subsequently becomes inaccurate. Eastspring Investments personnel may develop views and opinions that are not stated in the materials or that are contrary to the views and opinions stated in the materials at any time and from time to time as the result of a negative factor that comes to its attention in respect to an investment or for any other reason or for no reason. Eastspring Investments shall not and shall have no duty to notify you of any such views and opinions. This document is solely for information and does not have any regard to the specific investment objectives, financial or tax situation and the particular needs of any specific person who may receive this document.


Eastspring Investments Inc. (Eastspring US) primary activity is to provide certain marketing, sales servicing, and client support in the US on behalf of Eastspring Investment (Singapore) Limited (“Eastspring Singapore”). Eastspring Singapore is an affiliated investment management entity that is domiciled and registered under, among other regulatory bodies, the Monetary Authority of Singapore (MAS). Eastspring Singapore and Eastspring US are both registered with the US Securities and Exchange Commission as a registered investment adviser. Registration as an adviser does not imply a level of skill or training. Eastspring US seeks to identify and introduce to Eastspring Singapore potential institutional client prospects. Such prospects, once introduced, would contract directly with Eastspring Singapore for any investment management or advisory services. Additional information about Eastspring Singapore and Eastspring US is also is available on the SEC’s website at www.adviserinfo.sec. gov.


Certain information contained herein constitutes "forward-looking statements", which can be identified by the use of forward-looking terminology such as "may", "will", "should", "expect", "anticipate", "project", "estimate", "intend", "continue" or "believe" or the negatives thereof, other variations thereof or comparable terminology. Such information is based on expectations, estimates and projections (and assumptions underlying such information) and cannot be relied upon as a guarantee of future performance. Due to various risks and uncertainties, actual events or results, or the actual performance of any fund may differ materially from those reflected or contemplated in such forward-looking statements.


Eastspring Investments companies (excluding JV companies) are ultimately wholly-owned / indirect subsidiaries / associate of Prudential plc of the United Kingdom. Eastspring Investments companies (including JV’s) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America.