Fears over the delta variant of the coronavirus will play a part in driving up volatility in the ASEAN markets, which face a mixed route to recovery, according to Pauline Ng of JPMorgan Asset Management. She is the lead portfolio manager for JPMorgan ASEAN Fund, which earns a Morningstar Analyst Rating of Silver.
The current wave of new variants may mean that normalization may take bit longer and lead to volatility, but Ng is hopeful that with wider vaccine availability, increased acceptance in vaccination and encouragement from the private sector will have a concerted effect of inching closer to herd immunity for ASEAN countries.
While the market is trading sideways, Ng says she remains staunchly committed to a few main themes, loading up on quality names that should withstand swinging sentiment while also positioning for a longer-term structural growth in the region.
In fact, over the long-term, this quality growth approach has rewarded her portfolio. Ng’s well-defined investment framework has worked well in finding good candidates with both attributes, according to William Chow, Morningstar’s associate director for manager research. “The strategy’s highly structured and proven investment process effectively combines a global research framework with the flexibility to invest in small- and mid-cap ideas under a solid risk management framework,” Chow comments.
According to Morningstar research, the fund stands out with a “proven investment process that is expertly executed by its impressive management team”. This well-defined investment framework works well in finding alpha from quality growth opportunities. Since its inception in 2009, the fund returns an annualized gain of 9.55%, outperforming by an impressive margin of 8% over the ASEAN equity Morningstar Category index.
Quality companies, in Ng’s definition, come with characteristics such as strong balance sheets, management teams with a track record of execution, and an ability to consistently generate cash flows. The companies that hit three-for-three tend to withstand volatility better than the broad market. In a recent conversation, Ng gave us with three picks that fall in this category and can ride through the current unsettled environment.
Old Economy’s Structural Growth
One core theme in Ng’s ASEAN portfolio is reflected in a 3% overweight in banks as of May. It invests 5.5% more in financial services than its Morningstar Category peers.
Unlike some managers topping up this sector to catch-up, Ng’s rationale goes beyond COVID-related reasons. She believes selective quality banks in ASEAN will enjoy a runway far longer than the post-pandemic recovery.
“Today, three of four people in many parts of this emerging ASEAN are underbanked or unbanked.” As a result, Ng sees an overall growth in the emerging part of ASEAN. For instance, banks in Indonesia and Vietnam have the potential to ride on strong tailwinds for the medium to longer term.
However, not all the banks will be a structural growth story, Ng says. As digital tools have enabled non-bank players to enter the industry, banks without a willingness to digitize will easily be disrupted and likely be forced out of the competitive landscape.
In her portfolio, PT Bank Central Asia Tbk (BBCA) is one of the committed players in the digitization wave. The bank has amassed a strong client base with QR-code banking and first-mover advantage in e-wallet. “BCA’s model gives commissions to ‘warung’ for servicing their own clients with mobile apps and QR codes. With shops spreading across villages, the bank can easily penetrate and even expand the addressable market.” The network of mom-and-pop shops, or ‘warung’, helps BCA get around high costs running numerous branches across Indonesia’s archipelagic geographics.
Further Headroom
Recently included to be a heavyweight in MSCI Southeast Asia Index, the SEA Ltd (SE) is also on Ng’s high-conviction list. Although the largest-cap ASEAN name was a lockdown beneficiary translating into nearly 400% rise in stock price in 2020, Ng sees plenty of headroom for growth. One of the favorable reasons is the demographics of the region in which it operates.
The ASEAN population of over 650 million is composed of a young and digitally savvy generation, with a median age of 30 in many countries. Last year, the region added 40 million Internet users compared to a hundred million over the 2015 to 2019 period. She sees these fundamental strengths as having the potential to play out for the companies with the right strategy and SEA is an example.
“When SEA first entered the [e-commerce] market, there was a lot of skepticism as (Alibaba-backed) Lazada was already present,” says Ng. SEA has subsequently been able to demonstrate how they can move very nimbly over time to deliver a value proposition that consumers want. This example infers management quality, which is expected to help SEA foster foothold in the digital space. “[Other than e-commerce,] there's still a lot of optionality with regard to some of more early-stage businesses that they're engaging, like digital banking and fintech,” she says.
Play Recovery with Quality
The third theme among her investment ideas is a mix bag of stocks that have been hard hit by COVID-19, and also by the rise and dominance of e-commerce, which has resulted in stock prices being undervalued in Ng’s opinion.
Examples include Airports Of Thailand (AOT), convenience store operator CP All (CPALL) and telecom provider Advanced Info Service (ADVANC). All three Thai-based stock picks were driven by bottom-up selection. “Our views about Thailand are translated into a very selective approach in positioning for ‘opening-up plays’. We focus on industries and companies where we see structural growth beyond just a V-shaped recovery and more importantly, companies that have healthy balance sheets,” adds Ng.
Finally, Ng points out that in each bucket of opportunities, quality remains key to differentiating good companies from the resi, in a rapidly evolving market. The dynamic side of the market compels her to “stay on top of the development on a weekly basis”. “Not every company would be able to make it for long term, in my opinion so we have to be looking at each of them very closely.”
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