Can sustainable Asian investing pay off?

Can sustainable Asian investing pay off?

We know that Asia is highly susceptible to climate change and environmental degradation. But at a time of uncertain Asian equity markets, we ask Victor Wong, Head of UOB Asset Management’s (UOBAM) Sustainability Office about whether there are real financial benefits to sustainable investing in Asia.  

Hi Victor, to kick off, can you give us UOBAM’s view of where Asian equity markets are heading?

Victor: In the weeks following the US announcement of a lower inflation number for July 2022 compared to June 2022, global equity markets cheered up substantially. The US’s S&P 500 Index rose by over 12 per cent in six weeks, only to give up these gains in the subsequent six weeks. Year-to-date (YTD), the S&P500 is down by about 20 per cent.

This level of volatility is mirrored in Asian markets but here the picture is mixed. ASEAN markets have outperformed and Indonesia, as a net exporter of commodities, has done particularly well, falling just 4.2 per cent YTD. Going forward, ASEAN markets look more resilient and likely to benefit from re-opening activities.

The Korea and Taiwan markets have been particularly weak, and both are down by over 30 per cent YTD, making them the worst-performing markets in Asia. These export-dependent markets may take longer to recover fully.

China’s SSE Composite Index is also down by close to 25 per cent YTD, and its top leadership seems to have fallen silent on growth targets. This, plus the lack of strong economic stimulus and first-half growth of just 2.5 per cent, leads us to suspect that the country will find it difficult to exceed 3.0 per cent growth this year. While we are neutral on the Chinese market, we think it will stay volatile for a while longer.

Given this backdrop, why should investors consider Asian equities?

Victor: Given attractive Asian equity valuations, there is potential for these markets to trend back up quickly. However, global economic conditions, while not expected to give way to a deep recession, could stay tough in the short term. So investors should brace for continued volatility as Asian businesses announce more negative earnings revisions over the next few months.

That said, it is helpful to put on a longer-term lens when thinking about Asian investing. Asia is one of the fastest-growing regions in the world. Already, nearly half of the world’s 5000 biggest companies by revenue are Asian based, and the region received half of all new investment over the past decade1.

In the wake of the Covid pandemic, this shift could become even more pronounced as global companies seek to co-locate their centres of production and consumption within Asia. We expect the region to dominate more of the global economy while becoming less reliant on global supply chains. There are therefore new and significant opportunities opening up in Asia that goes beyond the current investment landscape.

How does Asian investing differ from sustainable Asian investing?

Asia’s large population is a driver of the region’s growth. But it is also a big drain on natural resources and makes the region more vulnerable to adverse environmental conditions. For example, a McKinsey report estimates that by 2050, a climate change-induced heatwave could result in a loss of outdoor working hours that could put between US$2.8 and US$4.7 trillion of Asia’s GDP at risk annually. In any given year, the potential for flood damage puts a further US$1.2 trillion of capital stock at risk.

Not surprisingly, Asian countries have seen an uptrend of government commitments and policy launches to address such threats. These include net zero and social development targets.  In the face of such major developments, it makes sense for anyone interested in securing long-term Asian equity returns to take into account the region’s environmental, social and governance factors.

Asian sustainable investing is based on two basic concepts. Firstly, we seek to achieve positive returns by selecting Asian sectors and companies that can boost their profits by taking advantage of policy changes and the growing demand for greener solutions. Secondly, we aim to minimise risk by avoiding companies that could be negatively impacted by their slow transition to greener solutions and response to policy changes.

Interest in sustainable investing has given rise to many Asian ESG funds. How different is the United Sustainable Asia Top-50 Fund?

Unlike other Asian ESG funds, the United SAT-50 fund invests in a fairly concentrated portfolio of 50 Asian companies. The fund bases its potential for long-term capital appreciation on these companies’  strong fundamentals and industry-leading sustainability performance. The fund currently has a focus on stand-out Asian companies within innovative, green-friendly industries such as digital services, electric vehicles, and renewables.  

The United SAT-50 fund is also unique in the way its company selection process is driven by artificial intelligence and machine learning (AI-ML), alongside the firm’s in-depth knowledge of Asian markets. This is done via UOBAM’s proprietary ESG Analyser which produces a materiality map of key ESG issues. AI-ML techniques such as Natural Language Processing is used to assess a company’s ESG impact which is then fed into the ESG Analyser, and subsequently incorporated into the company’s ESG score.  Together with fundamental research by UOBAM’s team of Asia-based investment professionals, this technique enables the SAT50 Fund to more efficiently identify companies with the potential for long-term, ESG-driven profitability.

As of 31 July 2022, the fund has returned a 4.89 per cent annualised performance over three years. In contrast, the fund’s benchmark, the MSCI All Country Asia Index, returned 3.08 per cent over the same period. From my point of view, this clearly demonstrates the potential for ESG considerations to add value to an Asian equities portfolio.

What should investors know before investing in sustainable Asian equities?

It is important to note that Asian equities can be a volatile asset class. Not only are the next few months likely to stay challenging given inflation, interest rate and recession fears, but there are other crises in future that could unsettle markets.

However, we know from historical investment cycles that these crises tend to come and go within months or a few years. On the other hand, megatrends such as Asia’s growing global influence, digital adoption and green transition are set to last for decades, if not entire lifetimes. Investors with longer time horizons have the potential to receive positive annual returns by harnessing these megatrends but should be prepared for these returns to be choppy over the short term.

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