Themes for 2020

For Professional Investors Only. This material is a communication to professional investors only and should not be disclosed to retail investors or other non-professional individuals without first contacting Marlborough for permission to communicate this material as a Financial Promotion. It has not been approved for this purpose.

Theme Descriptions 2020-21

Global backdrop

After three years of chaos, we anticipate that Brexit will move from the current euphoria stage immediately after the General Election to a delivery stage. Whilst we anticipate this being fraught with difficulty in negotiations, the Conservative Majority should make passing the necessary legislation somewhat more straightforward, giving greater certainty to markets, which we anticipate will underpin the Pound. Once the UK leaves, the absence of its MEPs in the EU Parliament will tip the balance of legislation against Commonwealth Countries (of which Asia has seven: HK, Singapore, Malaysia, Myanmar, India, Australia and New Zealand) in favour of China (40% of MEPs post Brexit come from countries with large Chinese investment). In the EU, the ascendancy of Christine Lagarde and Ursula von der Leyen tips the scale in favour of fiscal stimulus, which ought to favour Thailand and Taiwan. In the US, although we anticipate President Trump being impeached, we do not expect the Senate to follow through, thus leaving him in place. We feel that there remains a strong possibility that he wins a second term, given the disarray of the Democrat opposition at present. Under those circumstances, we see the global economy slightly firmer in 2020, which should be helpful for oil. We also anticipate oil being supported by the continuation of Iranian sanctions and with so many oil service companies having failed, we anticipate unexpected shutdowns becoming more frequent. Our base case is therefore for oil to range between $65 and $75 in 2020.

Asian Themes

ESG goes mainstream

With regulators requiring every fund to assume ESG characteristics, we expect initial strong, undifferentiated underperformance from companies whose sectors are judged as problematic as investors unused to ESG-style scoring enter the space. This is likely to cause a capital drought in sectors such as refineries, mining, etc, which may encourage M&A and investment by Private Equity and Governments eager to secure continued access to end products. Scarcity of capital may cause supply shortages and price rises, with profits accruing to private owners, rather than listed funds. Companies thought capable of achieving an ESG ratings uplift should outperform, as the major index providers include them for the first time, or increase ratings.

Government Divestments/ IPOs / placings

With nowhere left to turn in fiscal or monetary terms, China needs to re-fill its coffers if it is to continue to support the transition of the economy from manufacturing to Services, especially in the face of alarmingly high levels of debt. With possibly the largest pool of state owned assets globally, we expect Beijing to start to sell down its stakes in SOE’s via any means possible – IPO, private placements and secondary public offerings, using the proceeds to support the central budget. Unlike in capitalist countries, China’s “National Team” of financial services houses will be directed to buy or underwrite issues, which will ensure the government gets its money. Once in the indices, ETFs will then be forced to buy further, allowing the National Team to cash out. We expect a similar move to divestments in India, but with no National Team to ensure listing success, issues may need to be cheaper to list successfully. The need to price at a good comparative price should support stocks in similar sectors before listing of each IPO, but thereafter, crowding out may start to occur. This should initially support Chinese markets, but indigestion is possible.

Internet of Things accelerates, led by Industrial

The start of 5G offers little really new to consumers, other than faster streaming, but has the potential to revolutionise manufacturing and the auto market and to catalyse a wave of telemedicine. This should underpin demand for semiconductors and their supply chain, which should benefit Taiwan and Korea the most. China has a wide range of companies offering 5G-linked products and should also benefit.

Chinese Manufacturing Diaspora

Years of increasing wages, taxes and political oversight were already pushing companies to consider leaving China long before the trade wars began. Now, with the supply-chain in turmoil, companies are re-locating as fast as they are able, choosing Vietnam for intermediate assembly and low-end electronic manufacturing; Thailand for automotive components and furniture as well as medical equipment; Malaysia for energy-intensive manufacture and high-end semiconductors, Singapore for R&D, meditech and design. Initially, the main beneficiaries will be those who lease or sell land and factories, but as those new sites are fitted out, manufacturers of machinery and HR services companies should see strong volume increases in demand and once the workforce are in place, mid-range housing should start to pick up.

ASEAN Rising

Closer political and economic integration, which started in 2015 with the launch of the ASEAN Economic Community, is now starting to bear fruit. The region of 500m people is on the verge of signing the new giant RCEP trade treaty and as it shakes off three years of political impasse, it is also the recipient of vast FDI from China.

Wild cards

North Korea

The likelihood of further opening of North Korea is not in doubt, only the timing. 2018 and 2019 saw flurries of activity and South Korea has implemented a substantial stimulus programme focused on building connective infrastructure to the border with the North. With the impeachment of President Trump, it has become even more unclear where this will go, as only the US can sign the Peace Treaty on behalf of South Korea to end the Korean War. Any further opening would provide a substantial boost to the economies of North East China and South Korea.

Xi Jinping’s power curtailed?
At end of 2019, there were some small signs of domestic unhappiness at the direction of Xi Jinping’s rule in China. Small scale (few hundreds of people) protests in universities about freedom of speech appeared, but people continued to hold their breath to see what Beijing would do to Hong Kong and Xinjiang and how they would react to the upcoming Taiwanese elections. Pockets of deep deprivation are being created by the death of heavy industry, mainly in the North East and coastal areas. These will bring dissatisfaction with the ruling regime, which may tip the balance in 2020.

Disclaimer: The stocks and ideas mentioned in this report should not be construed as a recommendation to buy or sell anything. This document is intended only as an illustration of the investment themes likely to prevail in Asia over the coming months and is based on our views at the time of writing. Opinions expressed are those of the Asian Equity Investment team and are subject to change without notice and do not take into account the particular investment objectives, financial situations or needs of individual investors.

Risk warnings
Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. Our funds invest for the long-term and may not be appropriate for investors who plan to take money out within five years. Tax treatment depends on individual circumstances and may change in the future. The fund will be exposed to stock markets. Stock market prices can move irrationally and be affected unpredictably by diverse factors, including political and economic events. The fund will invest in shares in emerging markets which can be more volatile than more developed markets. Changes in exchange rates may affect the value of your investment. In certain market conditions some assets in the fund may be less liquid and therefore more difficult to sell at their true value or in a timely manner.

Regulatory Information
This material is for distribution to professional clients only and should not be distributed to or relied upon by any other persons. It’s provided for general information purposes only and is not personal advice to anyone to invest in any fund or product. The Key Investor Information Documents and the Prospectuses for all funds are available, in English, free of charge and can be obtained directly using the contact details in this document. They can also be downloaded from An investor must always read these before investing. Information taken from trade and other sources is believed to be reliable, although we don’t represent this as accurate or complete and it shouldn’t be relied upon as such. Calls may be recorded for training and monitoring purposes. Issued by Marlborough Fund Managers Ltd, authorised and regulated by the Financial Conduct Authority (reference number 141660). Registered office: Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP. Registered in England No. 02061177.