Too big to ignore

Geoff Bazzan Maple-Brown Abbott MSCI Asia McKinsey and Company ASEAN Mukesh Ambani Reliance

12 November 2021
| By Industry |
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At just around 10% of the global benchmark, investors could be forgiven for overlooking the Asia ex-Japan region when constructing their portfolio of global shares and instead focus on the United States and Europe, which account for around 60% and 17%, respectively. 

What is missing from this picture is that Asia is anything but small on virtually all other metrics. Accounting for 29% of global gross domestic product (GDP) (see Chart 1), the region is expected to remain the engine room of global growth as it recovers from the pandemic and to comprise some 50% of global activity by 2050, broadly in line with its share of global population.

Of course, these numbers include a de minimis allocation to China which, despite being the second-largest equity capital market in the world, accounts for less than 4% of the global MSCI All Country benchmark. 

This means Asia is far more significant to the global economy than implied by its current index weight. In fact, there are more listed companies with a market value over US$1 billion ($1.3 billion) across the Asia ex-Japan region than can be found in either the United States or Europe. According to Factset, there are 3,387 of that size in Asia ex-Japan compared to 2,324 in the US and 1,487 in Europe. 

In other words, Asia is simply too big to ignore. 

From the perspective of an Australian-domiciled investor, even more interesting than the long tail of listed companies on offer is the range of potential industry and economic exposures Asia provides. Across the 11 constituent (benchmark) markets in Asia, investors are able to gain exposure to a myriad of industry sectors and companies simply not found in the domestic market. 

From leading-edge semiconductor manufacturing and design to the full chain of automobile manufacture and supply (both NEV and conventional), and under-penetrated consumer segments and nascent financial sector exposures, Asia offers a much wider and more diverse suite of investment options than are present in our local market. 

Why Asia?

There are many facets to investing in Asia. Perhaps the most important long-term structural dynamic investors should consider are aligned to the vast opportunity afforded by the power of the rising middle-class populations across the region. A recent report by McKinsey and Company summarised it succinctly, when they noted that “Asia is the world’s consumption growth engine – miss Asia and you could miss half of the global picture, a US$10 trillion consumption growth opportunity over the next decade”.

The authors note that in 2000, the consuming class consisted of just 15% of the region’s population. By 2030, it is estimated that some 70% of Asia’s population, or three billion people, will join the consuming class. Further, the composition of the consuming classes within Asia is likely to shift as incomes rise. 

The inexorable shift in consumption patterns across the world’s growth engine from China in the North to ASEAN in the South and India in the West is likely to remain an enduring investment thematic for many years to come. Chart 2 shows the proportion of consumers by country compared to some non-Asian countries. 

This opportunity is further supported by the relatively strong position of household balance sheets across the region. With household debt in most countries within Asia ex-Japan well below developed market norms, the potential for consumption growth to resume to the positive trend of pre-pandemic levels is well supported (see Chart 3, overleaf).  

A shining example 

There are many examples of how this dynamic will manifest itself across the region, however none are perhaps as pervasive as India, the region’s, and indeed the world’s, most populated nation. Within India, its largest company (and portfolio holding) Reliance Industries is a powerful example of this opportunity. 

Reliance Industries is India’s largest private sector company and the country’s largest benchmark constituent, with its aggregate turnover accounting for almost 3% of India’s GDP and some 9% of the country’s total merchandise exports. 

Historically, the business had its origins in chemicals and refining, operating one of the world’s most efficient and integrated refining and petrochemicals plants. The company has continued to invest in its legacy businesses, as well investing heavily in new energy technologies with an ambitious target of being carbon neutral by 2035. 

Reliance under its chair and chief executive, Mukesh Ambani, has also embarked on a remarkable transition over the last decade. Specifically, Reliance has established market-leading positions in India’s burgeoning retail and mobile telecoms sectors. From a standing start just a few years ago, both businesses had grown to account for almost 40% of consolidated group earnings before interest, taxes, depreciation (EBITDA) as at the end of 2019 and are set to account for an even higher share in the years to come. 

Such a collection of high-quality, market-leading businesses under the one roof has led one leading research house to refer to the company as “India’s Exxon, AT&T and Amazon rolled into one”.  

With over 12,700 stores across more than 7,000 towns and cities and over 33 million square feet of floor space, Reliance Retail is by far the largest retail business in India.

Comprising a multi-channel strategy across five consumption baskets straddling both the physical and online realm, it represents a unique exposure to one of the most exciting retail markets in the world. 

Despite growing exponentially over the past decade, organised retail in India is estimated to be just 11% of the total retail expenditure at US$88 billion. Allied to the growth in income across the country, organised retail is forecast to grow at 19% a year over the next five years to reach US$231 billion by 2025.   

As impressive as the growth in Reliance Retail has been, it is Reliance’s telecom subsidiary Jio Infocomm (Jio) that has attracted the most attention and excitement. Since launching its pan-India digital 4G network in 2016, Jio had amassed 429.5 million subscribers as at September 2021, making it the fastest growing digital services company globally. 

Since entering the market, Jio has drastically transformed the Indian mobile landscape via its deeply discounted mass market offering and is the only operator outside of China to achieve 400 million subscribers in a single market. 

Although India is the second-largest mobile market in the world, with over one billion subscribers, it remains relatively underpenetrated among smartphone users, with some 300 million 2G feature phone users expected to migrate to 4G services over the next 12 to 18 months. 

Such a huge opportunity is even greater in rural India where access to the internet is estimated to be 35%. With Jio launching with generous data and voice plans for as little as INR 49 per month (that is, less than US$1), it is no wonder the company has transformed India’s 4G data usage, which has grown by a factor of 53 since Jio was launched in 2016. With India having some of the lowest real data and voice costs anywhere in the world, we expect recently announced tariff increases of as much as 40% are only just the beginning.

Underlying financial strength 

Much is made of the volatility within Asian markets and the need for caution with respect to varying levels of governance, regulation and government intervention. What is less talked about is the underlying financial strength a vast number of Asian corporates possess. 

In terms of balance sheet strength, Asia is extremely well positioned relative to most other markets and indeed its own history. For many management teams across the region, the 1997 Asian Financial Crisis provided a powerful lesson that is deeply entrenched in the corporate memory of many management teams across the region.

As well as providing a valuable buffer to the potential impacts of rising interest rates, the rude health of Asian balance sheets also affords a solid foundation to support our expectation of growing dividends across the region. 

We have long observed the potential for Asian corporates to increase their dividend payout ratios and enhance shareholder returns through more efficient capital management structures. With a payout ratio well behind the rest of the world and a more robust financial footing, we see strong grounds for an increase in returns to shareholders over the years to come.

Valuation opportunities 

In many respects, the Asia ex-Japan region should represent a bigger proportion of the global benchmark than it does based on its significance to the global economy, its large middle-class population, the strength of its corporate balance sheets and the myriad of industry sectors and companies. 

There is one final reason why investors should consider an allocation to Asia: the wide range of deeply undervalued investment opportunities on offer across the region. Although headline valuation multiples do not convey such a strong message, valuation dispersion remains at extreme levels in Asia, just as it does globally. 

In addition, with Asia underperforming the rest of the world year to date by a wide margin, there are many companies trading at deep discounts to their intrinsic value that we expect will reward patient shareholders greatly. 

As the lingering effects of the pandemic fade further into the rearview mirror, we expect the long-term structural case for the Asia ex-Japan region to continue attracting global portfolio flows and for its benchmark representation to grow as a consequence. 

Geoff Bazzan is head of Asia Pacific equities at Maple-Brown Abbott.

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