Julian McCormack of Platinum Asset Management (pictured) considers the case for investing in Asia.

Separately, Michael Collins of Magellan Financial Group examines the coming boom in quantum computing

Just three years ago, amid “global synchronous growth”, Asian equity markets were favoured by investors, posting returns of 31 per cent in the year to December 2017 in Australian dollars (as measured by the MSCI All Country Asia ex-Japan Net Index).

Since then we have had monetary tightening in the US helping to strengthen the US dollar, a trade war between the US and China, and a global pandemic originating in China.

All of these factors are negative for global growth and negative for “emerging markets”, which for most investors include non-Japan Asia.  

Further, there are fears of ongoing trade and broader geopolitical tension between China and the US, as well as cogent arguments that the US dollar will remain strong, or indeed strengthen for the foreseeable future.

Amid all this, the case for investing in Asia may seem hard to fathom.

While it may not feel like it at present, Asia has delivered strong returns to investors over the long term.

Over the 15 years to April 2020, the MSCI AC Asia ex-Japan Net index has delivered an annualised return of 8.8 per cent per annum, compared with the MSCI AC World Net Index’s annualised return of 7.4 per cent (in Australian dollars).  

Asia’s returns tend to be more volatile, but long-term investors would do well to consider Asia in this context.

Most investors would be familiar with non-Japan Asia’s rapid rates of economic growth, with current World Bank forecasts looking for it to average 5.6 per cent per annum to 2022 in non-Japan Asia, compared with 2.6 per cent globally and 1.5 per cent in developed economies – albeit all such forecasts are subject to great uncertainty at present.

What really interests us as investors, however, is the outstanding value available in Asia. The shares of many of the world’s best businesses, with large markets and great track records, are trading in Asia at significant discounts to comparable businesses in other regions.

(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a licensed financial adviser before acting on themes in this article).

Large consumer markets

In an era of heightened geopolitical tension, we favour businesses that can grow by leveraging the growth of consumer demand internal to Asian economies, rather than trade exposed manufacturers.

An example would be Chinese insurance giant Ping An, which is a general lines insurer and one of the leading users of technology in the finance industry globally in our view.

Chinese household incomes were growing at 6-8 per cent as of 2019 (National Bureau of Statistics of China) and the populace is under-insured relative to other countries in our view, providing a long runway for growth for Chinese insurers.

Over the last quarter of a century Ping An has transformed itself from a tiny property and casualty insurer into a giant financial conglomerate. Management’s strategy has been to build a “financial supermarket” in which different subsidiaries cross-sell each other’s products, with particular strengths in the use of data and artificial intelligence.

For example, should a Ping An client have a bingle in their car, they can get out, film the damage and submit this for a claims assessment that is determined in seconds, using artificial intelligence (company filings, management interviews).

Today this premier financial company with a market cap of A$286 billion and a history of decades of 20 per cent earnings growth, can be bought on eight times earnings, or a 12 per cent earnings yield.

Among Asia’s tech giants, we are particularly interested in Tencent. The company’s businesses encompass gaming, chat and cloud businesses. It is debt free, with net cash on the balance sheet at 31 March).

The company’s strategy has been to build a user ecosystem rather than just applications. Further, it has invested in fast-growing, adjacent businesses, giving it options over other branches of online activity such as ride hailing, electric vehicles, buy-now-pay-later services, to name a few. These investments are in both China and overseas: the company’s recently announced stake in AfterPay is a local example.

Tencent has grown sales at more than 40 per cent and earnings per share at more than 30 per cent for a decade. Indeed, the company has grown sales and earnings per share faster than Amazon over the last decade (FactSet).

Yet we are able to buy Tencent shares at an expected 2020 PE ratio of 30 times, compared to more than 90 times for Amazon (FactSet, consensus data used).

While it is fair that there are risks and uncertainties in Asia, we see this is as the opportunity. Current travails are giving investors the chance to buy into strong companies in this fast-growing region at attractive valuations. 

Paul Benioff (born 1930) is a US physicist who in 1980 imagined the feats that computing might achieve if it could harness quantum mechanics, where quantum refers to the tiniest amount of something needed to interact with something else. It is basically the world of atoms and sub-atomic particles.

Benioff’s imagination helped give rise to the phrase quantum computing, a term that heralds how the storage and manipulation of information at the sub-atomic level would usher in computing feats far beyond those of so-called classical computers.

Benioff was, coincidently, thinking about a vague concept being outlined by Russian mathematician Yuri Manin (born 1937). Since then, many others have promoted the potential of computing grounded in the concept of “superposition”, when matter can be in different states at the same time.

Quantum computing is built on manipulating the superposition of the qubit, the name of its computational unit. Qubits are said to be in the “basis states” of 0 or 1 at the same time when in superposition, whereas a computational unit in classical computing can only be 0 or 1.

This qubit characteristic, on top of the ability of qubits to engage with qubits that are not physically connected – a characteristic known as entanglement– is what proponents say gives quantum computers the theoretical ability to calculate millions of possibilities in seconds, something far beyond the power of the transistors powering classical computers.

In 2012, US physicist and academic John Preskill (born 1953) devised the term quantum supremacy to describe how quantum machines one day could make classical computers look archaic.

In October last year, a long-awaited world-first arrived. NASA and Google claimed to have attained quantum supremacy when something not “terribly useful” was computed “in seconds, what would have taken even the largest and most advanced supercomputers thousands of years”.

The two were modest in saying their computation on a 53-qubit machine meant they were only able “to do one thing faster, not everything faster”. Yet IBM peers doused their claim as “grandiosity” anyway, saying one of IBM’s supercomputers could have done the same task in two and a half days.

Nonetheless, most experts agreed the world had edged closer to the transformative technology. Hundreds of millions of dollars are pouring into research because advocates claim quantum computing promises simulations, searches, encryptions and optimisations that will lead to advancements in artificial intelligence, communications, encryption, finance, medicine, space exploration and even traffic flows.

No one questions that practical quantum computing could change the world. But the hurdles are formidable to accomplish a leap built on finicky qubits in superposition, entanglement and “error correction”, which is the term for overcoming “decoherence” caused by derailed qubits that cannot be identified as out of whack when they are in superposition.

There is no knowing as to when, or if, a concept reliant on mastering so many tricky variables will eventuate. Although incremental advancements will be common, the watershed breakthrough could prove elusive for a while yet.

To be clear, quantum computing is expected to be designed to work alongside classical computers, not replace them. Quantum computers are large machines that require their qubits to be kept near absolute zero (minus 273 degrees celsius) temperature, so do not expect them in your smartphones or laptops.

Also, rather than the large number of relatively simple calculations done by classical computers, quantum computers are only suited to a limited number of highly complex problems with many interacting variables.

Quantum computing would come with drawbacks too. The most flagged disadvantage is the warnings that a quantum computer could quickly crack the encryption that protects classical computers. Another concern is that quantum computing’s potential would add to global tensions if one superpower gained an edge.

The same applies in the commercial world if one company dominates. Like artificial intelligence, quantum computing has had its winters – when its challenges smothered the excitement and research dropped off.

That points to the biggest qualification about today’s optimism around quantum computing, that it might take a long time to get beyond today’s rudimentary levels where quantum machines are no more powerful than classical supercomputers and cannot do practical things. But if quantum computing becomes mainstream, a new technological era will have started.

A full version of this article on quantum computing (and sources) – and other Magellan insights - is available here.