Robin Parbrook, Head of Asia ex Japan equities, looks ahead into 2013
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For professional investors and advisers only. This document is not suitable for retail clients.
As much as people had hoped for bipartisan cooperation in the US, a solution to the eurozone debacle and a rebalancing of China’s economy, it simply didn’t happen.
Nor did we expect any major improvements. We retain our cautious outlook on both the US and eurozone while in China we believe the once-in-a-decade leadership transition will not immediately lead to the structural changes the economy desperately needs. The more likely scenario is a continuation of the status quo.
However, we do think Asia is relatively resilient in the face of this global uncertainty and most importantly we can find enough good investment ideas that meet our high standards of quality. We are cautious on the earnings outlook for many Chinese companies but the development of Southeast Asian economies, as they adhere to domestic consumption-focused growth models, provides a balance to this.
The Chinese Recovery
Among the constant din of American electioneering in the past few months, people may have forgotten that we are also witnessing a political transition in the world’s second-biggest economy. The People’s Party Congress, which kicked off in the second week of November, has seen successors being named to the posts of President, Premier and also the Politburo Standing Committee. All this talk of political transition has whipped up optimism that this change will bring about rebalancing and new stimulus measures. Furthermore, the recent data coming out of China suggest that the economy has ‘bottomed’ and is set to see resurgent growth.
Major disconnect
We are treating all of this with some scepticism. Short-term statistics in China are indeed showing some pick up but a rebound was widely expected in the run up to November’s political show in Beijing. The numbers, as usual in the case of China statistics, also appear to bear little correlation to what we are hearing on the ground in China or via our channel checks. The October export number for China looks particularly odd with the 10% yearon- year export growth number inconsistent with the export trends coming from pretty much everywhere else we monitor.
The current ‘improving’ economic numbers in China should also raise red flags to any long-term stockmarket investor. As Chart 1 highlights, what is driving the recent pick-up in growth forecasts for China is an acceleration of fixed asset investment (FAI). Retail sales and consumption are actually lagging. In short, this is exactly what we don’t want to see – more excess capacity and more questionable infrastructure build out equals falling returns on capital for shareholders. We remain cautious on China’s stockmarkets and nothing on the political front indicates any commitment to real change, or to rebalancing the economy from an investment led model to a more consumption based one.
ASEAN persuasion
The Association of Southeast Asian Nations (ASEAN) countries have continued to outperform the wider region – something which they’ve managed to do for the past two years. The key ASEAN members are Singapore, Indonesia, Malaysia, the Philippines and Thailand. Previously seen as a region wrought with fiscal indiscipline and political turmoil, countries there have managed to establish political stability, improve the investment environment and further strengthen their economic fundamentals, with Thailand, the Philippines and Indonesia in particular performing well. The key for all three of these countries is that they are coming off a low base. The capital stock in Indonesia and the Philippines is too low whereas Thailand is underinvested given its relatively high GDP per capita.
Given the lack of investment coming into the region after the Asian financial crisis of 1997, most of these countries need to raise their investment rates. With banks in the ASEAN region liquid and well-funded and confidence rising we expect growth to be well supported in the region both from strong domestic demand and a cyclical pick-up in investment going into 2013.
Bargain hunting in the wider region
While we are cautious on China and relatively upbeat on ASEAN, what about other Asian countries? As always, we remain very much committed to our bottom-up stock picking approach in markets which, more than ever, are prone to global economic uncertainty. In Hong Kong, despite its close ties to China, we still see value in certain sectors, particularly industrials and consumer discretionary. Names that are exposed to the domestic consumer story in Asia, as well as firms with strong corporate governance, cashflows and balance sheets, tend to dominate our Hong Kong holdings. The city is primarily placed to benefit from any pick-up in sentiment in China while its blue-chip firms remain some of the strongest franchises throughout the region.
Negative data
We haven’t altered our view that Taiwan and Korea’s economies will continue to experience weakness going into the new year. The two countries are heavily-dependent on exports to developed countries (ranging from smartphones in Taiwan to cars in Korea) and the recent trade data from the two have been disappointing. This trade slowdown doesn’t show any signs of picking up in 2013.
India has been receiving a lot of press coverage over the past few months, most of it concerning negative economic data. Again, our overall view on India hasn’t changed and we see it facing difficulties going into 2013. Its swelling fiscal deficit, high inflation and political gridlock have ensured that the country’s dream of emulating China-like rates of growth remain just that. We still see value in certain names in sectors where the country has a strong brand – namely technology and healthcare – but remain cautious on the macro outlook.
Policy crisis
We remain sceptical that the imbalances inherent in the global economy will be magically transformed in 2013. In fact we are greatly concerned about the negative effects of a zero interest rate policy in the US on the rest of the world. Artificially low interest rates block creative destruction by keeping unprofitable companies alive and encourage malinvestment which only serves to store up the next credit crisis.
Core values
Our bottom-up stockpicking approach remains the core part of our strategy. We continue to seek out companies which are strongly positioned to benefit from the long-term trends that are taking shape in Asia – namely attractive demographics, increasing domestic consumer spending and continued infrastructure investment.
In recent visits to Singapore, Korea and Hong Kong our discussions with company management mostly centered on margin pressures, competition and weak end demand.
This is not all that surprising in the case of exporters and industrials, but perhaps so for property investors, financials and retailers in North Asia and Singapore, which are seeing pressure from rising costs and relatively sluggish demand. This is likely to continue into next year.
A sweet spot
In contrast, we have been nudging up our fair values for many companies in the ASEAN region. Margins have been improving and we think we should remain in a sweet spot for many companies in the next one to two years, with rising demand with little margin pressure from new entrants. We therefore see no reason to rush for the exit just because the ASEAN region has outperformed the Chinese, Korean and Taiwanese markets, which face cyclical and in some cases structural headwinds.
At current levels, we see most markets as being fairly valued. We retain our focus on quality franchises with strong corporate governance, cashflows and balance sheets, all of which will help them weather the current global economic uncertainty while continuing to grow.
Important Information:
For professional investors and advisers only. This document is not suitable for retail clients.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
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Source: ETFWorld – Schroders
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