What a difference a year makes.
In the Asia-Pacific region, the cautious optimism and resiliency of 2021 has become clouded by pressures both global and domestic — and investors are looking for clarity.
“The last twelve months have been particularly difficult in APAC, which has felt all three of the major global equity market headwinds: Ukraine, inflation, and Covid-zero constraints on growth,” said Martin Yule, head of Asia-Pacific research at UBS.
Additionally, second order effects like commodity price strength, supply-chain issues, and food inflation are conspiring to dampen growth and optimism in the region. “With some very significant issues to resolve, 2022 looks like a year of volatility and uncertainty,” he said.
All of this means the buy side is focused on the global macro themes of the day and how they impact investing, according to Citi’s Brent Robinson. “There is plenty to worry about so far during 2022 — inflation, stagflation, monetary policy tightening and interest rate hikes, the rising dollar, China policy, supply-chain disruptions, oil, geopolitical risks in Europe and elsewhere, and the probability of a coming recession,” he said. “Revert back 12 months ago, and only a couple of these macro concerns were being considered.”
The past year has been a “challenging” one for the markets, concurred Erica Poon Werkun, head of Asia-Pacific securities research at Credit Suisse. “Not only have valuation benchmarks corrected with rising bond yields, triggered in turn by the sharp rise in global inflation, global growth has emerged as a new concern, particularly after the Russia-Ukraine conflict started,” she said.
As has happened in the past, investors have pulled funds out of emerging markets in response to the uncertainty. This includes those in Asia, with concerns about the region’s economy accentuated by its dependence on importing its energy needs. (Energy exporting economies such as Indonesia and Malaysia have done better so far.)
“In general, though, compared to the previous episodes of Fed tightening, EM Asia is likely to be much more resilient – the economies are much larger, with stronger macroeconomic health,” Werkun said. “Once Covid lockdowns are lifted, revival in the Chinese economy itself can be a boost for the region. India, too, has several underlying growth drivers such as a reviving real-estate construction market, and unexpectedly strong growth in services exports.”
A major feature of Asian markets since February 2021 has been the relative underperformance of China and growth stocks, according to William Greene, head of Asia research at Morgan Stanley. “As a result, investor participation has been broader across a much wider range of markets, sectors, and styles than in the prior period,” he said. “For example, ASEAN markets and India have significantly outperformed whilst value stocks and energy/materials names have also done well. Fortunately, our strategy and quantitative research teams were early in identifying these shifts in performance, which have been amongst the largest on record.”
This effort was not lost on investors who have once again identified Morgan Stanley as the region’s top equity research provider, according to Institutional Investor’s 29th annual All-Asia Research Team survey.
Based on the opinion of more than 4,800 investment professionals at over 1,400 institutions with major securities holdings in the region, voters recognized the same core group of providers as last year. Citi moved up one spot to share second place with UBS. JPMorgan Chase & Co. and BofA Securities repeated their fourth and fifth place finishes, respectively.
The lack of movement in the leaderboard, which was weighted by each respondent’s equity commissions for Asia ex-Japan, also accentuated the razor-thin margins among the top providers. Only one team position separated first place Morgan Stanley (35) from runner-ups Citi and UBS (34). JPMorgan had the biggest improvement with 31 team positions, up from 26 last year.
The survey responses were also weighted by each voting firm’s Asian ex-Japan equity assets under management to produce an AUM-weighted ranking, which mirrored the commissioned-weighted results.
While equity research offerings are still being shaped by the region’s approach to the pandemic — including China’s ‘zero-Covid’ approach, which sent the country back into lockdown in March in response to the Omicron variant — some providers see a light at the end of the tunnel.
“Outside of Hong Kong and China, Covid is fading in the rear‐view mirror,” said Morgan Stanley’s Greene. “Economies have initiated plans to live with Covid and are reopening. Restrictions are at their least cumbersome since the start of the pandemic. Activity in the contact‐intensive services segment is likely to rebound quickly, lifting employment. These jobs tend to be in the middle- to low-end of the income spectrum, so the bounce in activity will help ensure a broad‐based upturn in consumption.”
At UBS, Yule reports that his team has become fairly used to operating under Covid-related restrictions, although these have reached a new level this year in places like Shanghai. “Being on the ground right across APAC is a long-term strategic advantage and allows us a level of diligence on companies that some currently struggle to attain,” he said. “The constraints around regional travel have made regional collaboration all the more important.”
Re-openings have also ushered in the return of some analyst travel. “In retrospect, the zero-Covid lockdowns have to some extent curbed infections, but at a cost of deeply impacting economic activity,” said Citi’s Robinson. “The good news is that in recent months, Asia has moved pretty aggressively to reopen across the region. Most of our offices are back to work or a combination of work-in-the-office and working-from-home. Clients are beginning to travel. At Citi, staff are beginning to travel broadly for the first time in a couple years.”
Robinson credits Citi’s long history in Asia, and Citi Research’s country footprint model with a regional and global sector overlay across equities, fixed income, strategy, economics, quant and commodities. “We work relentlessly each day to offer bottom-up local investment analysis within a global multi-asset context for our clients worldwide,” he said.
More recently that has meant recognizing the blurring across traditional sectors for innovations such as electric vehicles and “smart car” technologies. “There has clearly been a slow bleed across traditional GIC sectors. Citi Research has adjusted by creating six critical ‘super-sectors’ to ensure we are collaborating and making connections across key themes to give our clients the best insights as technological innovation alters both traditional and new sectors.”
Technology as an enabler of change has arguably brought many sectors closer together, observed Yule, and made collaboration even more critical. “Certainly many of the most relevant investment themes today encompass a broad range of sectors: the value chain of electric vehicles; connected devices; robotic technologies; renewable energy, etc,” he said.
His firm continues to invest in its alternative data collection and interpretation capability known as Evidence Lab to source and interpret data sets for its analysts. “We believe the sell-side needs to evolve from the opinion business to the evidence business, and that is why we created UBS Evidence Lab,” Yule said.
Credit Suisse, last year’s most improved provider, held steady at sixth place in this year’s commission-based results. “We continue to focus on our immersive approach to industry, where analysts leverage their expertise and contacts to provide a holistic view to investors,” Werkun said. This includes work on a private company ecosystem of the region, incorporation of new data sets for analysts, and collaboration with quantitative strategy and ESG teams.