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Turning point

By Team Global Equities/ Absolute Return Multi Asset

2022 is an extremely challenging year, characterised by a high degree of instability and upheaval. The global economy is going through a difficult period and the uncertainty about future growth remains. A slew of negative news stories is dampening the mood of market participants.

The barbarity of the seemingly endless Ukraine war is disturbing. In Asia, China is currently taking a hard line on lockdown policy, which is stalling global trade. At the same time, as a result of some developments, on both sides of the Atlantic we are seeing runaway inflation not seen for decades, which is forcing central banks to act. But they are faced with a dilemma. As the storm clouds are darkening on the economic horizon, central banks have to respond by hiking interest rates, although this is causing jitters on the markets. In any case, we have to take our leave of the times when inflation was as low as it was in the years following the financial crisis.

Another part of the big picture is that the greening of the economy is gathering pace and is calling for investment. All in all, we can expect these hurdles and various themes to keep the markets in thrall for some time to come.

Pushback against globalisation

Many companies dealing with supply chain shocks stemming from the coronavirus pandemic and related lockdowns, the Ukraine war and rising inflation are now taking action. They are in the process of reorganising and boosting their local production in order to get around any global bottlenecks. This is leading to greater independence.

However, de-globalisation or less globalisation also means fewer cost benefits from the international division of labour. This, in turn, is leading to higher prices and lower growth, with very different consequences for different countries and regions. The European continent and Germany in particular with its strong export orientation are faced with considerable challenges as a result.

Structural changes present an opportunity to invest

During the pandemic, society underwent some far-reaching changes. New forms of day-to-day and working life emerged or gained momentum as a result of the crisis. For this reason, it makes sense to focus on structural trends that can offer long-term growth opportunities and make up for any losses comparatively well.

Themes such as the ever-present digitalisation are defining people’s lives and behaviour. In addition, there has been fresh thinking about mobility. The advancement of electromobility with the addition of new functions is a key theme for the future of the (German) automotive industry – helping to protect the climate and reduce fossil fuel dependence. Some successes have been chalked up, and the number of newly registered electric vehicles in recent years has been testament to growing acceptance among the public at large. Overall, according to Statista, the number of electric passenger cars surpassed one million in 2021. The market share of electric vehicles rose to a quarter of all new registrations. Incidentally, China is the country in which the highest number of electric cars are produced and registered.

In addition, the European Commission recently unveiled the REPowerEU plan to transition the European energy system. Commission President Ursula von der Leyen pointed out that massive investment and reforms are required. REPowerEU is intended to accelerate the introduction of renewable energies to replace fossil fuels. Other structural megatrends are cloud computing – or how to capitalise on growth in data volumes (data as a new commodity) – and the e-commerce boom in sports equipment. What these trends have in common is that they are happening separately from economic developments and they are long-term in nature.

Asia is where things are happening!

Being able to recognise trends is one thing, but which companies are profiting and in what regions are they located? The US has been instrumental in driving trends and innovations in recent decades, and has written the rules itself. The Asian continent, especially China, is now trying to do the same thing and is not wasting any time. Innovation often takes place now in Asia, where there is much more innovative spirit than in large parts of the western world.

For example, China is investing heavily in building up charging infrastructure for electric cars. At the same time, battery manufacturers in e-mobility are gaining in importance worldwide. Suppliers are becoming more powerful. The most important suppliers of batteries for electric cars are located in Asia. With the exception of Tesla, all of the biggest manufacturers of battery cells for electric cars come from Eastern Asia and hold a global market share of more than 90%.

All in all, the energy transition is further increasing demand for corresponding semi-conductor products in particular. Asian companies in particular are benefitting due to their domination of the market. Asia is thus undermining Europe, but also the US to an increasing extent, and is becoming the leader. Unsurprisingly, Chinese research and development (R&D) spending reached a new record last year.

To date, the growth in the importance of Asia has been inadequately reflected in the international capital market. For example, the MSCI World contains relatively few Asian stocks. In this respect, it is worth considering a re-allocation into Asia – moreover with a long-term focus.

Although the Chinese economy is currently slowing down significantly as a result of the lockdowns, the authorities in Beijing will not stand idly by. There is too much at stake. Extensive fiscal stimuli should ensue and the Chinese central bank can and will probably further loosen its monetary policy, in contrast with many other industrialised nations. This, in turn, could stimulate the economy – with corresponding positive effects for global growth. In addition, we take the view that many of the negative news stories have already been priced into the equity market and that now is a good time to enter the market.

Our investment solution – MainFirst Megatrends Asia

MainFirst Megatrends Asia is an equity fund we launched last year that pursues a growth strategy and focuses on companies that can benefit long-term from a structural growth trend. Potential investee companies are also analysed and positioned according to sustainability criteria and make the fund an Article 8 fund under the Disclosure Regulation (SFDR). As an integral part of our assessment, we rely on the ESG analysis of the specialist data provider Sustainalytics.

We are ultimately confident that the pandemic and the ongoing Ukraine war, if not watershed moments, are key milestones in a “new era”, which will produce its own winners and losers. Companies that anticipate or can exploit structural trends will benefit. In this respect, the Asian continent remains at the forefront.

Authors: Global Equities/Absolute Return Multi Asset portfolio management team


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