At Templeton Emerging Markets Group, we believe Asia’s combination of rapid economic growth, generally strong national finances and economic fundamentals has created an attractive landscape for equity investors. Seismic changes have been taking place in Asia’s political arena over the past couple of years, including major elections, leadership transitions and even a military coup. These political shifts have economic reform implications as well. Although some of these reforms are historically unprecedented, we believe they offer investors reasons to be optimistic. In particular, smaller companies in emerging markets appear poised to potentially benefit amid more market-friendly reforms that break down barriers to entry and inspire entrepreneurship. Additionally, since small-cap companies are driven primarily by domestic demand, the recent drop in oil prices could be an added boon to these companies by freeing up consumer dollars.
Expectations of high economic growth rates in emerging Asia (driven by China and India) remain a key attraction to us. We believe such growth rates will be comfortably in excess of developed market growth rates in 2015.
Moreover, many Asian markets, among them China, India, Indonesia and South Korea, have announced or embarked upon significant reform measures differing in details, but generally aimed at sweeping away bureaucratic barriers to economic growth, encouraging entrepreneurship and exposing inefficient industries to market discipline. Most are also looking to rebalance economic activity away from export- and investment-heavy models to become more oriented toward consumer demand. Let’s examine a few of these reforms in select countries.
South Korea: Promoting innovation and entrepreneurship
In 2014, South Korea launched a three-year plan to attract investors by focusing on innovation and cutting red tape for business. In our opinion, the most exciting element lies in proposals for “the creative economy,” which feature a set of measures aimed at fostering entrepreneurship and funneling funds toward startups, with an emphasis on projects that apply South Korea’s strengths in information and communications technologies to other economic areas. Measures such as tax breaks for “angel investors,” visas for foreign entrepreneurs, state loans and purpose-built “incubators” providing facilities for high-technology startups are aimed at smoothing the way for new business launches. Another strand of the policy to encourage entrepreneurship is a pledge to reduce bureaucracy in key service industries such as health care, education, finance, tourism and software. We feel the health care and retail sectors could likely benefit most from these reforms.
China: Changes in financial, state-owned enterprise (SOE) sectors look promising
Reform efforts in China seem to be gaining momentum. Key initiatives announced thus far include deregulation and the opening of more industries to private investment, financial liberalization, resource pricing reforms, SOE reforms to improve efficiency and productivity, and the relaxation of the one-child policy, which we believe should enhance China’s long-term growth potential and promote greater domestic consumption. We have found good value in banks in particular, mainly larger banks with stronger deposit franchises, and in other financial companies that have the potential to benefit from the development of capital markets. We also see good long-term value in the building materials sector, which has undergone massive market consolidation and capacity rationalization. Underpinned by structural demand growth, pharmaceuticals and selected companies in the consumer sector should, in our view, also benefit. We believe the government’s ongoing efforts to rebalance the economy away from exports and investment toward domestic consumption look positive for the long-term performance of both the economy and markets.
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