To The Moon

16 Dec 2024

Trump 2.0 will not be the only catalyst for fundamental change

By Asian Equity Team

Asian small companies: beneficiaries of key growth trends worldwide  

We have a favourable outlook for Asian small companies [ 4 ] given key factors that highlight their resilience and potential for growth in the current economic landscape.  

Many Asian small companies can weather economic fluctuations and geopolitical risks. The key competitive advantage of these firms stems from their scale of operations, which provides management with greater agility in responding to shifting trends compared to their larger peers. Additionally, many Asian small companies exhibit higher earnings growth than their bigger counterparts (please see: From beauty products to bicycles: the promising landscape of Asian small companies ).  

Smaller companies in Asia also benefit from major global fundamental changes such as the rise of AI, an expanding MZ demographic (Millennials and Generation Z), energy transition and the nearshoring of operations due to ongoing global trade tensions. For instance, the economies of South Korea and Taiwan have a technology-focused legacy. Their companies are closely integrated into the industry’s global supply chain and are well-positioned to benefit from the proliferation of AI applications and tools.   

Globally, Asia ex-Japan remains the main area of opportunity for the small companies space. In the past five years, the region has had the largest percentage of new listings, indicating potential sustainable* return opportunities for long-term investment (Chart 5). However, it is worth noting that small companies in Asia face near-term challenges, such as macroeconomic uncertainties and weak market sentiment.   

Chart 5: 5-year percentage change in listed companies as at end-June 2024

Asian small companies represent a compelling opportunity, characterised by strong growth potential and adaptability. Their ability to leverage emerging trends and navigate economic uncertainties favourably positions them in the market. They may face challenges, but their long-term performance history coupled with current supportive conditions suggest that Asian small caps will continue to thrive. A cursory glance at the performance of Asian small companies since 2000 shows that they have outperformed their larger counterparts more than half the time.  

Those seeking diversification and exposure to high-growth sectors may want to focus on Asian small companies as they are likely to play a crucial role in shaping the economic landscape of the region in the coming years.  

Asia REITs: rising potential and opportunities  

Asia REITs have been growing in both depth and breadth as an asset class. With the introduction of new, specific sectors to securitise, more countries and companies have implemented REIT regimes and mandates in recent years.   

Robust industry and asset fundamentals anchor the share price performance of REITs, making them a favoured asset class for investors seeking sustainable* returns over a longer time frame. We focus on sectors that are experiencing genuine fundamental change and offer multi-year structural growth. Such sectors include data centres, where rental yield appreciation has accelerated amid the lack of supply. Another example is India and its high-growth economy, which holds a unique position as a global office hub.   

Singapore also stands out with its resilience across sectors thanks to regulatory support, particularly during the COVID-19 pandemic. This defensiveness is likely to persist, underpinned by healthy business sentiment and low future supply. As asset yields have started to show positive spreads over the cost of capital, we also see more opportunities for good quality acquisitive growth, with transaction activity expected to gradually increase. Valuations are not at demanding levels; they are below mid-cycle levels, offering sustainable* and attractive returns (please see: Prospect of lower rates makes Asian REITs an increasingly vibrant asset class ).  

ASEAN: domestic policies to drive positive fundamental change 

As ASEAN markets lagged the US, Asia ex-Japan and China during the first Trump administration, a casual observer may view the region’s prospects under Trump’s second term negatively. However, we note that US interest rates, which rose in the early years of Trump’s first term, are currently trending lower. ASEAN also suffered during Trump 1.0 from the lingering effects of the 2014 collapse of commodity prices, but we do not expect this scenario to be repeated. In our view, many of the positives driving recent ASEAN performance are still underappreciated outside the region, as indicated by foreign ownership levels (Chart 6).  

Chart 6: Foreign ownership levels of ASEAN equity markets 

Buoyed by expectations of lower rates, ASEAN has already outperformed the US and Asia ex-Japan markets since mid-2024, and trails China only narrowly. Despite the likely onset of inflationary policies under Trump’s second term, we believe that the US monetary easing cycle will continue in 2025. This is supportive for ASEAN markets, especially Indonesia, the Philippines and Vietnam.   

Under the Trump administration, we see added impetus for China plus one as manufacturers, including those from China, continue to seek low-cost and low-tariff production locations. This will benefit most ASEAN countries, particularly Vietnam and Malaysia.   

ASEAN is also integrated into the AI theme, especially Malaysia where a data centre boom is underway. This is positive for power producers, constructors, industrial landowners and data centre operators, thus broadening the range of sustainable* return opportunities for longer-term investment.    

In addition to the aforementioned factors, we see favourable fundamental changes in the domestic policies of several ASEAN countries.  

Malaysia’s unity government has presided over a period of relative political stability and is expected to be more pro-growth over the second half of its political term. Additionally, stronger economic integration with Singapore should support Malaysia’s manufacturing, technology, and tourism sectors.   

In Indonesia, the government of President Prabowo Subianto has laid down ambitious plans to lift economic growth. Key policies include an ongoing push for downstream activity in the electric vehicle (EV) and commodities supply chains, and reduced fuel imports via higher biodiesel blending.   

In Vietnam, newly-installed Secretary General To Lam is expected to implement more pragmatic and pro-business policies, which would be a significant departure from the ideology and centralised control wielded by his predecessor.  

China: authorities committed to economic turnaround   

China’s equity markets are poised for a complex but potentially positive fundamental shift in 2025, driven by a combination of policy interventions and economic recovery signals. Recent fiscal measures, including a significant stimulus package estimated at Renminbi (RMB) 6 to 10 trillion [ 5 ] , are aimed at stabilising economic activity (please see: Are China’s stimulus measures enough? ).  Such optimism is supported by an anticipated end to earnings downgrades, with a new upgrade cycle expected in early 2025 as earnings visibility improves and corporate buybacks continue.  

As always, some headwinds remain. The labour market is still weak and deflationary pressures continue to curb domestic consumption, although targeted government measures may help to mitigate this. Geopolitical tensions, particularly regarding US-China relations, add another layer of uncertainty that could influence market dynamics (please see: If Trump wins: uncertainties and opportunities from an Asian equity perspective ). Despite these risks, a selective focus on high-quality sectors—particularly in consumption, energy, and healthcare—may yield favourable outcomes as valuations remain well below historical averages.   

Overall, while low investor conviction is likely to result in volatility, the Chinese authorities’ commitment to economic stabilisation and the potential for earnings recovery suggests that China’s equity markets could experience solid returns in 2025. However, these positive outcomes are contingent on effective policy execution and a geopolitical environment that favours effective deal-making over zero-sum [ 6 ] solutions. For a sustained improvement in the markets, we need to see household consumption pick up from depressed levels (Chart 7). For almost three years, households have been saving and paying down debt (Chart 8). Any positive turnaround in outlook for China could see such a trend change dramatically for the better.  

Chart 7: China consumer confidence levels

Chart 8: China household savings and deposits

Conclusion  

Many may expect the incoming Trump administration’s transactional approach to be detrimental to the geopolitical and macroeconomic landscapes. However, we believe that Washington’s mercantilist [ 7 ] stance should not prevent Asian markets from offering attractive absolute returns, as was the case during the 2017-2021 period under Trump’s first term. Additionally, a shift to lower interest rates is expected to provide an extra boost, as it can benefit large parts of Asia by reducing the costs of capital and production. This is especially true if such a fundamental change is reinforced with government policy support and positive structural reform from Asia’s leading economies. Lower interest rates and better economic prospects could once again favour growth over value—a trend we have not witnessed for over three years. While 2025 is likely to be anything but dull, we remain steadfast in our search for quality names with the most competent management teams, forward-looking strategies, as well as the versatility to mitigate risks and seize new opportunities. It is our core belief that companies possessing these characteristics will continue to thrive by harnessing change to deliver sustainable* returns under any macroeconomic backdrop.

[ 4 ] Companies with market capitalisations of over US dollar (USD) 100 million but less than USD 2 billion

[ 5 ] Source: Bloomberg, November 2024

[ 6 ] Zero-sum refers to a situation where a gain for one side results in a corresponding loss for the other side.

[ 7 ] Mercantilism was the dominant economic system from the 16th century to the 18th century. It was based on the idea that a nation's wealth and power were best served by increasing exports and reducing imports.

[ * ] “sustainable" refers to the durability of returns based on our fundamental assessment, not environmental sustainable

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