2017 Best Singapore Equity Winner Q&A - Nikko AM Shenton Thrift Fund

M: Morningstar K: Kenneth Tang, Senior Portfolio Manager, Nikko AM Asia Limited

M: Could you highlight any major changes you made to the portfolio over the course of 2016? Were there any particular holding that drove the fund’s performance for the year?

K: Our Singapore strategy was relatively defensive in 2016, especially given the external uncertainties and volatility. We expected that the outlook for corporate earnings in Singapore would be challenged due to a slowing external economy and restructuring challenges domestically. We believe Singapore is in economic transition, recalibrating its growth levers to remain competitive to deliver long term sustainable growth.  We were cautiously optimistic that this economic restructuring would eventually pave the way for a more sustainable recovery in corporate earnings in the medium term. As a result, we paid particular attention to sectors which would be likely winners and losers amid this economic transformation.

In terms of stock selection, we overweighted various sub-sectors within the service industry, which we felt would benefit from the domestic restructuring and transformation. Healthcare, tourism, logistics and technology services stood out as attractive sectors with solid long term structural growth drivers in place.  The stock picks within the service sector helped our performance against the broader market, which is represented more by traditional banking, property and industrial companies.

M: What is your outlook for 2017 specific to the markets you cover, and how are you positioned to take advantage of opportunities and/or mitigate potential risks?

K: We believe that the prospects for corporate earnings in Singapore have improved in recent months. Domestic economic indicators in 4Q2016 have improved for the better: residential sales are recovering, the rate of decline in net business formations are slowing and inflation has moved out of negative territory. On the external front, global economic markers such as electronic exports, industrial production, shipping throughput and volumes as well as capital expenditure intentions for companies are starting to look up in 4Q2016. These suggest a recovery in the near term and raise our conviction that we may be at a cusp of an earnings up-cycle in Singapore. 

We believe 2017 could mark the year of expansion, with stronger corporate earnings on the back of positive external growth tailwinds and the moderation of domestic cost pressures. Valuations are also attractive at this stage of the cycle. Lastly, we expect policy conditions to be accommodative for stock selection. We also believe the outlook for Singapore equities and stock selection alpha should improve materially as economic expansion ensues. We expect greater bifurcation in stock and sector selection as the recovery progresses. Alpha is usually positively correlated with rising yields and reflation, which is characteristic of most economic recoveries.

We remain positive on franchises with sustainable growth and quality companies that are able to grow earnings and compound dividends in the current environment. We also remain upbeat on sectors within the New Singapore that are well placed in today’s disruptive economic climate. We favour the services eco-system where we consider logistics, healthcare, food, data centres and technology as emerging beneficiaries. Disruption pressures have intensified and we believe restructuring opportunities will continue to feature as we transition to the New Singapore. We also like the consumer and industrial sectors as we expect strong earnings surprises in the next 6-12 months. The tailwind of higher commodity prices and recovering volumes should benefit palm oil companies while the acceleration of global manufacturing should benefit the technology and industrial sectors.

M: Can you comment on the macro risks in the global economy, such as the change in leadership in the US, and the significant headwinds faced by emerging markets? How do these risks affect your investment decisions?

K: Looking back on 2016, capital markets had become highly conditioned to a “lower for longer” interest rate environment, with the search for yield having implications both within and across risk asset classes. Even before the US election result, markets had started to factor in a more inflationary outlook. The exact cause of this more conducive pricing environment can be debated, but the rate of growth within China and its knock-on implications for commodity prices is certainly one contributing factor. Trump’s election, along with his success in both houses of Congress, means his policy promises have a reasonable probability of being delivered. Higher fiscal spending combined with possible protectionism and easier regulation on businesses are all inflationary in nature. Existing economic trends in the US are suggestive of a tightening labour market, making any growth surprise likely to be more inflationary. Chinese credit conditions, albeit too focused on the old state-owned enterprises, have been much easier than expected, supporting both global demand and commodity prices. Economic stagnation is the default setting for many investors, and hence there remains potential for reappraising the relative merits of equities and those businesses more reliant on a conducive economy.

We believe that Trump’s surprise victory augurs well for equities over the medium-term. US equities will benefit, mostly due to lower taxes on corporates, but also due to stronger global economic growth. Obviously, it is a challenging outlook in several regards, and there is great uncertainty about his methods, but his goal is clear: to spur investment and new jobs in the US via lower taxes and looser regulations. We also believe that there will be a moderately positive effect on the rest of the developed world economy, although none will benefit as much as the US due to the large fiscal and regulatory stimuli that are planned.

Emerging Market (EM) equities are also attractively priced. However, increasingly tight financial conditions caused by higher rates and a resurgent dollar are a source of concern given high levels of leverage. While Trump’s policies would appear to be an unmitigated disaster for global trade growth, we believe the near-term impact could be limited if the focus is on the renegotiation of trade deals rather than on pushing tariffs. Hence as long as global demand remains supported by China, and the increasingly likely US fiscal stimulus, we expect to see a further broadening of the EM economic recovery. The key however will be whether the right balance can be achieved between improving global demand and tighter financial conditions.

We remain relatively optimistic on economic prospects in Asia, as global asset markets adjust to real economic improvements, higher consumer prices and arguably mostly to perceived fiscal stimulus as the new preferred policy tool. We do not doubt that fiscal stimulus will make a meaningful impact in Asia as the likes of Philippines, Thailand, Indonesia, India and China have articulated plans for new infrastructure. We expect Asia region GDP growth to be moderate, with the likelihood that a better 2016 print for China will lead to a slightly lower rate in 2017 as both monetary and fiscal stimulus wane slightly. The rest of Asia will see marginal changes, though at the stock level, we estimate that aggregate corporate earnings will be one of the strongest in several years (c.12-14% growth) with supportive forward valuations of 12x price-to-earnings and 1.25x price-to-book.

M: How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?

K: Our Asian equity team is helmed by Head of Equity Peter Sartori, an industry veteran with 26 years of investing experience. The team comprises 17 members with an average of 17 years’ investment management experience. The Singapore strategy is co-led by two senior portfolio managers, Kenneth Tang and Lai Yeu Huan, who are jointly responsible for generating and implementing ideas for all Singapore Equities portfolios.

Our lead portfolio managers are supported by our analysts in terms of investment coverage. We currently have an eight-person sector analyst team for Singapore sector coverage.

Rounding out our investment team is our macro specialist. We think we have one of the highest-quality and most experienced macro specialists in the market. He has over 25 years’ experience covering the Asia-Pacific region from a top-down and macro perspective.

The experience of a team is very important. Combined, the lead portfolio managers for Singapore have close to 40 years of experience. They are supported by an equally strong bandwidth and deep pool of research analysts. Many members of the team have also worked together for a long time, experiencing many different market cycles.

We have a robust investment culture at Nikko Asset Management. Our only aim is to deliver strong investment performance for clients.  Every investment idea is thoroughly researched and debated before it goes into any portfolio.

The investment team and structure have remained intact over the past year.

View all Morningstar Singapore Fund Awards 2017 articles here.