With Asian equities exhibiting extreme volatility during the past year, delegates at the third Morningstar Institutional Conference sought insight on how to manoeuver the dynamic investment landscape. Our Asian equities panellists outlined their outlook for the asset class, key opportunities they found in the region, as well as some of the lessons learnt.
Richard Jones, Director at First State Stewart Asia, and Louisa Lo, Deputy Head of Asia ex-Japan Equities at Schroders, shared their thoughts on the Asian equities market. Jones manages First State Asian Growth, which has a Morningstar Analyst Rating of Silver, and Lo manages the Bronze-rated Schroder ISF Emerging Asia.
The panel kicked off with a live poll which revealed the majority of the audience was cautious on the outlook for Asian equities. Echoing the audience’s wary stance, Lo said there were many factors contributing to economic uncertainty, such as the Fed’s interest rate cycle, China’s growth rate, and commodity prices. As a result, her portfolio has been more defensively positioned. Agreeing with Lo, Jones stated the various risk factors combined with excess liquidity and high valuations create a difficult investing environment. As such, he has been more concerned about protecting capital rather than trying to make money.
In an environment where growth has been hard to find, many investors have turned to dividend-paying stocks to pursue income. While both of our panellists agree cash flow and dividend yield are important factors in their stock selection processes, they cautioned that investing solely on that basis was dangerous. Jones observed that many high-dividend-paying companies, such as Link REIT, traded at extremely high valuations while offering limited growth. Combined with a record low interest rate backdrop, these could potentially be very risky investments. Lo revealed she held some high-dividend-paying stocks, such as Taiwanese telecom companies, but shared Jones’ concern about stretched valuations. Moreover, she noted dividend yields for certain markets have been coming down.
Finding Investment Opportunities
The discussion turned to where the panellists have been finding investment opportunities in the region. For Lo, this was predominantly in China and Hong Kong. She explained that Chinese market valuations, particular the price/book ratio, have been approaching a 10-year low. In addition, the Chinese investment universe has been expanding, and she found select opportunities in the U.S-listed Chinese Internet sector and domestic A-share market. Given the hazy macro outlook, Lo also invested in a number of off-benchmark Hong Kong names, which are generally known for their better-quality, higher earnings visibility and dividend support.
On the other hand, Jones was a proponent of India given the abundance of quality companies in the country. He cited high barriers to entry, high cost of capital, and limited competition, while China was the exact opposite, in his opinion. Moreover, he believed Indian companies focused on long-term stewardship and possessed professional management, which should help produce strong returns. He particularly liked IT service exporters such as Infosys and Tata Consultancy Services, which were more reasonably valued than the domestic Indian stocks.
Although the two had contrasting views on China and India, Lo and Jones shared their pessimism towards Korea. Both pointed to the country’s poor corporate governance culture, where companies are run to empire-build and not to generate returns for shareholders. Nonetheless, Lo recognised Samsung Electronics’ global competitiveness, and it regaining market share from Apple. Jones, though praising Samsung’s products and top management’s business savvy, reiterated his worries about the misalignment of interests and urged the need for reform in the country.
Consumption has been a popular theme in the region and it was interesting to see the two panellists tapping into the story in different ways. In addition to the U.S.-listed Chinese Internet stocks, Lo favoured a number of Taiwanese information and communication technology companies which were globally competitive and benefit from product cycle upswings. On the consumer discretionary side, she preferred the service industries, such as education, tourism and gaming stocks. Lo avoided consumer staples, however, citing expensive valuations.
Offering an alternative view, Jones liked consumer staples for their strong franchises, cash flow, and branding power. In an environment where there is little growth, he believed it made sense to own high-quality companies with good management. Dairy Farm, Sun Art Retail Group and Uni-President were some of the names he owned in the sector. Furthermore, Jones noted these businesses have become much cheaper than before, from 25–30 times P/E, to 15–20 times.
Reflecting on a Difficult Year
As the session came to a close, our panellists reflected on some of the mistakes they have made recently. Both panellists struggled in Chinese consumer-related names. Jones quoted the example of Want Want China, which he bought at expensive valuations but which had failed to deliver growth. He explained the snack manufacturer’s once-successful distribution model became insufficient in a fast-changing consumer landscape with intense competition from e-commerce.
E-commerce had also hit some of Lo’s investments in traditional retailers. She had bet on a few mall operators for their physical assets, strong cash flow, and deep discount to net asset value but later realised they were value traps given the structural shift in the market. Lo rounded up the panel by shasring her insight on the Chinese Internet market, saying it is a closed market with no global competitors. Within this space, she preferred a platform play with a relatively asset-light business model, such as Alibaba. Going forward, she expected the industry to consolidate as the major players to continue to grow inorganically through acquisitions.
Global economic uncertainty and the scarcity of growth had even the best Asian equity portfolio managers struggling during the past year. Nonetheless, an expanding investment universe and increasingly attractive valuations present select opportunities. Now more than ever, our panellists urge the importance of adhering to a proven investment process to weather the market turbulence.
