The long-term secular drivers of Resource Efficiency (“RE”) markets, namely population growth, urbanisation and resource demand are particularly compelling in Asia and China, India and Japan. Air quality is a major public health problem throughout Asia. Many Indian cities have levels of air pollution that are consistently way above that of Beijing. Access to a safe water supply is one of the top priorities for developing Asia. After years of prevarication, the improved political stability in these countries is allowing governments to make firm, long-term commitments to invest in environmental infrastructure build out and implement major allocations to environmental protection.
Falling oil price positive for government spending
The recent fall in the oil price is another strong positive for government investment in the region. Rapidly growing demand for energy has necessitated years of high energy subsidies that can now be reduced. Governments have more money to spend and greater confidence in investing to improve infrastructure and ameliorate pollution problems, further supporting long term economic growth.
Corporate restructuring has been another driver of outperformance
Investment performance of Asian RE companies has been bolstered further by increased levels of corporate restructuring across the region. M&A activity has gathered momentum with some high profile and sizeable deals, for example Beijing Enterprises increasing its stake in China Gas, Advantech and Hiwin forming a joint venture and KKR’s takeover of Goodpack. There has also been a resurgence of the IPO market with Ozner, Dynagreen, Beijing Urban Construction Design and Shengmu all coming to market in 2014.
Improving efficiency and governance in China
Market reforms in China are providing further impetus to investment. The restructuring of State Owned Enterprises is improving business efficiency, corporate governance and profitability for many companies.
The introduction of the Shanghai-Hong Kong Mutual Market Access (“MMA”) has also created more investment opportunities in the China A-share market, in turn increasing the accessible RE investment universe by over 10%.
China – reforms accelerating, value emerging
Following two years of relative stalemate while the Chinese leadership and government assumed power, infrastructure and spending in environmental projects has at last been accelerated and remains at the top of the political agenda. China is approaching the completion of its 12th five-year plan; historically the investment and build out comes in the second half of the five-year period, and already more than US$330bn has been pledged to tackle the pollution of scarce water resources and stringent new targets have been set to reduce air pollution by up to 25%. President Xi appears to have an even stronger focus on environmental protection for the next five-year plan to the end of 2020. There is already a significant increase in new project approvals and bidding for projects in waste water, high speed rail and metro and waste-to-energy projects which are translating into further investment opportunities in companies involved in these sectors.India – huge infrastructure deficit
If Narendra Modi’s succeeds in removing much of the bureaucratic red tape in the Indian government we expect to see swifter implementation of major infrastructure projects which have historically struggled to complete at anything like the original intended scale, or indeed to even get off the ground.
India’s estimated economic growth is likely to lead to a trebling in energy consumption by 2050 but the country’s domestic coal and gas supply has failed to keep pace with demand, leading to power rationing and outages. The government has responded with a commitment of US$100bn to renewable energy investment in the next five years, in wind, solar and power grid build out. Massive investments in the water supply chain are also being made. India is already under significant water stress and demand is set to outstrip supply by 50% by 2020. US$20bn has been set aside for the five years ending March 2017 for building irrigation, water treatment, recycling and desalination projects.
Japan – focus on efficiency
Prime Minister Shinzo Abe is expected to win another term with a healthy majority and strong mandate after calling for a snap election. With longer-term political stability we are optimistic that additional plans for economic stimulus will be positive and some of the downside macro-economic risks will dissipate. In recent years the strength of the Yen led to cost cutting but companies are finally reaping the benefits of their weaker currency and margins are improving. The RE opportunity in Japan is focused on energy efficiency, particularly factory automation, manufacturers of high value-add efficient components and electrification of cars. Japan is a world leader in automation and lean manufacturing and has one of the highest factory robot density ratios in the world. Japanese companies are increasingly well placed to export these technologies, in particular to its Asian neighbours that are looking to improve efficiencies, especially now that the Yen has weakened.
Strong, sustained economic growth in China, India and Japan looks set to continue and we believe that the stars continue to be aligned for further outperformance of RE markets across the region. Improved political stability, a major focus on environmental infrastructure roll out and a growing number of investment opportunities, driven by corporate restructuring, M&A and IPOs should continue to furnish investors with strong long term out-performance.
David Li is Director and Manager of the Asia-Pacific strategy at Impax.