- Marketing communication -
Any investor dealing with the topic of ETFs today cannot ignore the MSCI World Index. It is not only because of its high profile that this index makes its way into many portfolios that aim for broad diversification. But how much diversification does the MSCI World really offer? Touted as a globally distributed investment with about 1,600 companies, about 65 percent of its weight is in the US, followed by Europe with about 30 percent. The obviously small remainder replicates Asian companies. However, the global balance of power has shifted significantly in recent years.
A study by Global Fortune revealed that a total of 203 of the 500 companies with the highest turnover are based in Asia. China and Japan alone account for 188 of these companies. Considering the speed of innovation in Asia, neglecting the continent would be a grave error. Over the past eight years, the average company in the MSCI World has increased its revenues by just 4 percent per year. The major developed economies covered by the index, led by the US, should be facing a decade of slower growth. Instead, we see countries such as South Korea and China investing heavily in research and development to successfully challenge the Western world's claim to leadership, as has already been evident in recent years. If you want to profit from trends in the technology sector over the next 10 years, you cannot ignore the Asian continent in your asset allocation. Therefore, it is only logical that we recently launched the MainFirst Megatrends Asia fund with a starting investment volume of almost USD 90 million to give our investors unfettered access to this growth market. We see the Silicon Valley of the future here, at least in part. At the same time, the speed with which new business models in Asia are being advanced and promoted by the state continues to increase. For example, China overtook the US in terms of research and development spending in 2020 and it is expected that by 2025, the People's Republic will already be investing around USD 900 billion annually here. The biggest opportunities in Asia are concentrated in core technology areas such as semiconductors, e-vehicles, artificial intelligence, robotics, and automation. The technological epicentres are the countries of South Korea, Japan, China and Taiwan. The impact of the economic advancement and increasing prosperity will inevitably be reflected in the consumer goods markets. While it cannot be ruled out that European brand groups will also benefit from the Asian dynamic, the Chinese government is now increasingly focusing on promoting local brand manufacturers.
Investing sustainably in Asia?
When it comes to integrating ESG criteria into their investment process, in an intercontinental comparison, Asian investors lag far behind. Although the investment market in Europe is changing at a rapid pace, according to Morningstar research only about one in four funds domiciled in Europe considers sustainability criteria in the context of Articles eight and nine of the European Union's Sustainable Finance Disclosure Regulation (SFDR). While funds with a European investment focus benefit from the fact that large companies have been publishing sustainability figures for years and are covered by the analyses of rating agencies, this becomes a real challenge for a fund investing in Asia. With our new Asia strategy, that takes the 10 principles of the UN Global Compact into account unconditionally, we are laying the foundation for the demanding sustainability analysis that a company must undergo before an investment decision is made. These principles cover the areas of human rights, labour rights, the environment, and corruption. As a result, promising business models often have to be removed from the investment list after a thorough ESG analysis. For example, Hon Hai Precision, the world's largest contract manufacturer of consumer electronics, communications, and computer products. It is Apple's largest supplier, and its business with Apple accounts for 50 percent of the company's total revenue. In March 2020, a report by the Australian Strategic Policy Institute (ASPI) revealed that several companies, including Hon Hai Precision Industry, also known as Foxconn, may have employed forced labourers from Xinjiang, China, or manufactured materials or products using forced labourers from Xinjiang. The ASPI claims that between 2017 and 2019, at least 80,000 Uighurs from Xinjiang were used in factories across the country.
With targeted investments in various areas of the e-mobility supply chain and in the field of renewable energies, however, we can make a direct contribution to reducing CO2 emissions. Japanese automation companies, in particular, offer the opportunity to make machine production more energy-efficient. For example, the Osaka-based specialist company Keyence, which, in addition to an excellent economic outlook, could also raise safety and working conditions in the world's factories to a new level through the use of sensor technology. Every single company in which we invest undergoes a sustainability analysis and is also screened for controversies by the ESG rating specialist, Sustainalytics.
Regulation of Chinese technology platforms
In the fourth quarter of 2020, government intervention halted the IPO of the Chinese technology finance company ANT Group. Since then, the regulatory intervention has caused uncertainty in a range of sectors. Large technology platforms, in particular, have been affected. However, the intentions of the Chinese government seem to follow a pattern. Policymakers are inevitably seeking greater access to data. In addition, the attempt to break up the large quasi-monopolies is creating more competition. Despite widespread concerns, such measures may even lead to an increase in economic prosperity in the medium term by stimulating competition between individual platforms. As long as the extent of these artificial interventions has not yet been conclusively clarified, investment in large Chinese platforms tends to be cautious. The political vehemence with which investment priorities are currently being supported should also not be underestimated. In particular, e-vehicles, lithium-ion batteries, renewable energies, and an expansion of prosperity among the population are impulses that offer long-term opportunities and, at the same time, have a lasting impact on society.
Authors: Frank Schwarz, Adrian Daniel, Jan-Christoph Herbst, Johannes Schweinebraden
Portfolio Management of the MainFirst Megatrends Asia, the MainFirst Global Equities Fund, the MainFirst Global Equities Unconstrained Fund and the MainFirst Absolute Return Multi Asset
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