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Asia first in the new digital age
Computer chips are replacing oil as fuel for our modern interconnected global economy, and Asia is full steam ahead
CONTENTS
cover story
The pandemic might have opened a window into Chinese equities for curious investors
Equity expansion
china
Covid-19 and a new prime minister compounded problems for an economy already built on shaky foundations
Slow restart
japan
Chinese tech names are making waves in Hong Kong’s capital markets and reviving the city-state’s reputation for fast-paced innovation
Ripple effect
hong kong
Back to the top
Making contact
vietnam
Growing giant
india
At a crossroads
Paradise tossed
thailand
Future foundations
indonesia
Tunnel vision
philippines
read more
Scientific method
south korea
Healthy signs
singapore
Can India follow the trajectory of its giant neighbour, China? It could – but there may be problems ahead
South Korea is poised to maintain its lead in technology against all odds
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A promising future awaits, despite the country’s battle with Covid and a volatile and unpredictable president
phillipines
Indonesia's promise lies in its youthful population and plans to improve its infrastructure
More than just a base for regional headquarters, Singapore is quickly becoming the go-to healthcare supplier across Asia
After a proactive response to Covid-19, Vietnam has everything in place to widen its influence and international presence
After taking a hit to its tourism industry, Thailand is turning to other avenues to find its long road to recovery
Is Asia set for a post-pandemic rally?
content from: pinebridge
Finding Opportunities in China
content from: matthews asia
The strong get stronger in India
Value opportunities abound in Japanese Equities
content from: nikko asset management
Vietnam: From paddy fields to Asia’s rising powerhouse
content from: vina capital
Find the best Asia managers
content from: citywire
Microchip manufacturing places Asia at the center of the global economy
asia wide China Hong Hong Japan South Korea India Indonesia Singapore Philippines Vietnam Thailand
Asia first in the new digital age Content from Pinebridge Equity expansion Content from Matthews Asia Ripple effect Slow restart Content from Nikko AM Scientific method Growing giant Content from Pinebridge Future foundations Healthy signs Tunnel vision Making contact Content from Vina Capital Paradised tossed
content from vina capital
content from pinebridge
content from nikko asset management
Despite operating below its potential for decades, Japan remains the world’s third-largest economy
content from matthews asia
Is Asia set for a post- pandemic rally?
content from: vinacapital
Terms & Conditions
COVER STORY
The author and historian Ian Morris considers in his book Why the West Rules – For Now how British boats shot their way up the Yangtze river in 1842, rather than Chinese boats up the Thames. To put it bluntly, he asks: why does the West rule? The common understanding, he says, is that the West rules because the industrial revolution happened in the West, not in the East. In 2020, however, businesses are looking to China, not the United States or Europe, for growth opportunities underpinned by a new, digital revolution. The information age is changing the game for investors and offering once-in-a-generation entry points for those getting in at ground zero. Businesses are looking to China, not the United States or Europe, for growth opportunities underpinned by a new, digital revolution.
Raising standards
amy maxwell
Computer chips are replacing oil as fuel in our modern interconnected global economy, and Asia is full steam ahead
It’s a message Tuan Huynh, CIO for Europe and Asia Pacific at Deutsche Bank, has been keen to communicate to his clients. ‘When I describe to our clients why we believe Asia will be the focus of this century, I suggest they remember that in the 30 to 40 years since China opened its border it has become the second largest economy in the world.’ He argues that given this swift progress, it’s not hard to imagine that in the next 10 to 15 years China could overtake the United states and take the top spot. What we are witnessing now in Asia, Huynh says, is not an emergence but a ‘re-emerging’. ‘China and India dominated the world for 1,600 to 1,700 years. Then you got a big shift to the West, which marked the first industrial revolution. You can clearly see that China, India, and the Asian region as a whole largely missed that trend.’
James Cheo, chief markets strategist, Southeast Asia at HSBC Private Bank, is certain the economic gravity is shifting towards Asia, even though the shift won’t happen overnight. ‘There is a rising middle class within Asia, and there will be much more urbanisation within cities. Therefore, spending patterns will rise to the levels we saw in developed and Western economies.’ To cater for this rising demand, Cheo believes the export machine within Asia will reorientate and sit where the biggest consumer markets are – the huge megacities and second-tier cities. ‘Production and supply chains will be situated closer to these cities to make this consumption pattern easier. That’s going to drive Asia’s growth in the years ahead,’ he says.
asia in a nutshell
elizabeth soon, cfa
Land Area
44.6 million km
48 (according to the UN)
Number of Countries
4.6 billion
Population
Russia
Largest Country (by land size)
Maldives
Smallest Country (by land size)
content from: pinebridge investments
As markets continue to react to short-term newsflow amidst uncertainty, PineBridge Investments’ veteran Asia equities...
‘I suggest they remember that in the 30 to 40 years since China opened its border it has become the second largest economy in the world’
‘The US will have its standards, and China will have its own standards. Everybody in between needs to meet both, so that’s a lot of investments’
‘That means interregional trade is far more important than international trade,’ remarked Ken Peng, head of Asia investment strategy at Citi Private Bank, as he assessed whether the next century will be dominated by Asia. ‘And that’s not severely affected by protectionism coming from the US,’ he continued. To capitalize on this, trend Peng is watching consumption and infrastructure – both old and new, very closely. He says that to facilitate more trade, governments will have to build more infrastructure, both physical and digital, and invest heavily into technology so they can observe the industry standards of both the West and East. ‘The US will have its standards, and China will have its own standards. Everybody in between needs to comply, so that’s a lot of investments,’ he says.
Silicon rally
Daryl Liew, Reyl Singapore’s chief investment officer, also believes that the fallout from the ‘trade war’ newsflow could be overblown. While he sees the ratcheting tension between the US and China as a risk due to its implications on global supply chains, he sees some regional silver linings. ‘In the short term, there might actually be ancillary benefits for certain countries within Asia as companies diversify their supply chains.’ ‘We’re already seeing some of the manufacturing moving out from China and into regions like Vietnam, Thailand, and Malaysia.’ ‘Trade is the first key driver to look at,’ agreed Alexander Wolf, Asia head of investment strategy at JP Morgan Private Bank. Technology was secondary but still important, he said, particularly for Northeast Asia.
‘They’re not unrelated. In fact, they’re very much interrelated.’ Whether its consumer goods, electronic devices, or medical devices, these products make up a large share of what is produced in Asia. ‘Korea and Taiwan combined produce the majority of the world’s semiconductors. These have become so crucial to the global economy,' Wolf says. Wolf argues that computer chips, as part of the modern economy and the unfolding digital revolution, are fuelling not just Asia’s growth but the entire functioning of our rapidly changing global economy. ‘In many ways, semiconductors are as crucial to a modern economy as oil was in the past,’ he says.
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Tuan Huynh, CIO for Europe and Asia Pacific, Deutsche Bank
Portfolio managers make room for Chinese equities
China’s investment landscape has been a closed book to foreign investors for decades. Misguided or outdated views have led to misconceptions about an economy that made the leap from laggard to leader and is now home to the world’s second biggest stock market after the US. The government is fuelling the country’s stellar rise and has made it its mission to create a healthy bull market. Grace Tam, Chief Investment Advisor, Hong Kong at BNP Paribas Wealth Management, is convinced that the Chinese leaders really mean it: ‘The government isn’t interested in fiscal stimulus at the level we’ve seen in the West. They want to be more targeted and generate wealth without continuing to increase their debt.’ That spells opportunity for investors who want to benefit from China’s opening up. Tuan Huynh, however, urges caution. The CIO for Europe and Asia Pacific at Deutsche Bank Wealth Management advises investors to hold their horses and says that ‘China won’t open its economy overnight. The government does have a clear long-term plan in place. Implementing it might not happen as fast as the US and other Western governments might hope.’
Catalyst coronavirus
Kathrin Schindler
Even so, foreign inflows soared, especially in the past few months when market dislocations due to Covid-19 prompted investors to flock to Chinese equities. According to data provider Morningstar, global money inflows into Chinese equity funds amounted to $2.2bn and $2.6bn in March and April this year. That stands in stark contrast to US equity funds, which bled a total of $22.3bn in the same period. Some strategists see the increasing interest in China as part of a bigger movement. ‘The shift toward Chinese stocks is a long-term trend, and it’s here to stay,’ says Yoon Ng, senior director for APAC Insights at fintech company Broadridge. She identifies four key drivers that will fuel the rush to Chinese equities further, with the growing importance of Chinese financial markets being one of them. ‘With growing wealth and strong relative GDP growth, China’s growing market capitalisation as well as its increased importance in global indices are attractive to investors who are looking for growth opportunities,’ Ng says. ‘The swift recovery of the Chinese economy post Covid-19, backed by successful containment and supportive policies, has also lent confidence to global investors.’
Easier access to China’s onshore market represents another important factor. Schemes like Stock Connect and the scrapping of QFII and RQFII quotas, for example, provide new possibilities to access China. Consequently, foreign investors are able to choose between several approaches to get exposure to Chinese equities. ‘The majority of global investors still see Chinese equities as part of their global EM exposure, which tends to focus on offshore Chinese equities. Yet, there are also investors who have started to build a stand-alone China allocation to get direct exposure, either via dedicated A-shares or an all-China allocation,’ Ng explains. In her opinion, it’s also the abolishment of foreign ownership restrictions for Chinese fund management licenses that will allow global managers to deepen their Chinese equity investment capabilities and, in turn, promote access for their global clients. Tam sings a similar tune: ‘From foreign investors' perspective, buying into Chinese equities is another way of diversification. Of course, the uptick in the last few months is also related to China’s economic recovery – they were the first in and are now the first out of the crisis.’ Alexander Wolf, head of investment strategy for Asia at JP Morgan Private Bank, agrees: ‘China was able to reopen factories earlier than any other economy. Despite levels of exports being down, they’ve taken a lot of market share. Last year, Chinese exports accounted for about 13% of global exports, whereas right now, they’re about 20%. Global export has served as a boost to China.’
china in a nutshell
andrew mattock, cfa
GDP per capita
10,261.7 usd (2019)
1,397.7 million (2019)
Beijing
Capital
Chinese Yuan (¥)
Currency symbol
Shanghai SE Composite Index
Key stock index
Over the past decade, China’s equity markets have undergone a significant transformation, deepening and expanding...
‘The government isn’t interested in fiscal stimulus at the level we’ve seen in the West. They want to be more targeted and generate wealth without continuing to increase their debt.’
Grace Tam, CIO of BNP Paribas Wealth Management
So what impact does the US–China trade war have on the country? While it poses a risk to China’s economy, it also provides an opportunity for a market that, despite its huge domestic ecosystem, has been heavily reliant on imports so far. Trade constrictions mean that the country is forced to source more materials domestically. For example, the government is adamant on hiking up semiconductor production, which currently only meets about 30% of China’s demand. [1] Healthcare and biotech are in the process of decoupling from foreign dependencies as well and already lead the way in areas like genomics and precision medicine. According to Deutsche Bank’s Huynh, the US–China spat also has a positive side effect on the renminbi. ‘An increasing number of trades is already affected in renminbi, especially with intra-Asian trade. I think the currency will dominate the region in the future. It needs to be seen how much more open China wants to be though,’ he says. Tam is of the same opinion: ‘The larger the use of the renminbi, the smaller the chances of currency depreciation and the more people will be willing to invest in Chinese stocks or bonds. ‘When China devalued the renminbi back in 2015, we saw large outflows, but I don’t think they’re going to do that again. Their intention is renminbi internationalization. It’s in their interest to have a stable renminbi, which should be positive for Chinese assets in turn.’
A blessing in disguise
THE NEW NORMAL: CHINA’S PATH FORWARD The weak global trade environment in the wake of Covid-19 has put a lot of pressure on Asia, except for China. The country stood out for a couple of reasons, not least because of its comparatively high exports. As Alexander Wolf, head of investment strategy for Asia at J.P. Morgan Private Bank, points out, ‘China operates more or less on an independent cycle that's driven by domestic demand, and domestic policy and provides a buffer against global slumps.’ The public mood in the country has also improved significantly since the coronavirus outbreak. Adam Livermore, partner at Dezan Shira & Associates, is working in the consultancy firm’s Dalian office and notes that ‘caution has morphed into mere habit’. In his insight report about the impact of Covid-19 on China, he also explains that ‘people are adjusting to the “new normal” and seem to realize that there is a long battle ahead … there is a general sense among the population that China will be able to manage the adaptation process more effectively than most governments around the world.’
content from: MATTHEWS ASIA
Chinese equity ‘homecoming’ marks new era for Hong Kong
Hong Kong has not had a smooth ride in recent years as Beijing flexes its muscle in the city-state. However, fresh legislation carved out as a result of the ongoing trade war between the US and China has resulted in significant investment opportunity. Grace Tam, chief investment adviser, Hong Kong at BNP Paribas Wealth Management, argues that the US suggestion that it may delist some Chinese tech stocks makes offshore Chinese equities in Hong Kong a whole lot more interesting. 'This has created ample opportunities especially for the Hong Kong market due to the "homecoming’" theme. Some big China ADRs are “coming back” to secondary list in the Hong Kong market. So, this is actually a positive for offshore China equities.' This has been made possible due to a change in the law to allow these tech companies to be included in the local flagship Hang Seng index. The government has gone one step further and launched the Hang Seng technology index to capitalise on this tech homecoming. 'It’s a Nasdaq-style technology board,' Tam says. 'We see it [Hang Seng Technology Index] attracting more inflows to the Hong Kong market because the index includes big China tech names. This is one of the key recent developments and going forward I think we’re going to see more related ETFs launches and other funds that track this index.'
Heir apparent
Amy Maxwell
That’s not to say, however, that there are no legacy issues to contend with. Ken Peng, head of Asia Investment Strategy at Citi Private Bank, explains: ‘I think Hong Kong has enjoyed structural advantages that may have spoiled the city a bit. Being the window for capital, goods and services for China – that’s clearly not a sustainable situation.’ But by focusing on its advantages, Peng believes Hong Kong can weather this recent volatile period. ‘Hong Kong still has the majority of its legal system, especially when it pertains to commercial activity. It still has low taxes. It’s still an extraordinarily attractive city to live in compared with most places on the mainland or around this region. I think there are opportunities to be had. It’s just a matter of when the leadership can take it there.’ With valuations currently at low levels, he believes investors can access the market at an attractive price. He warns, however, that investors should be watchful that Hong Kong doesn’t rest on its laurels. ‘Generally speaking, there are opportunities in Hong Kong because the whole market is depressed in terms of valuation. But in the longer run, it still needs to be developing tech, looking at consumption in a modern way, and focusing on e-commerce rather than real estate.’ Alexander Wolf, Asia head of investment strategy at JP Morgan Private Bank, is on the same page. He believes Hong Kong’s current situation is simply the latest juncture on its long and evolving journey. He expects to see plenty more transitions for Hong Kong as the Chinese capital markets continue to grow. Hong Kong, he says, will increasingly be used as an entry and exit point for capital flows and portfolio investment, versus its traditional role of goods exports and foreign direct investment. ‘I think in the past people have been quick to talk about the end of Hong Kong, whether at the handover [to China from Britain in 1997] or with Sars, but Hong Kong has always been able to find a role to play. ‘I think if anything, China is going to continue to increase in importance as a share of the world economy, and it’s hard to see Hong Kong not playing a significant role in that.’
hong kong in a nutshell
48,755.8 USD (2019)
7.5 million (2019)
Hong Kong
Hong Kong Dollar ($)
Hang Seng Index (HSI)
Fun fact
International Commerce Centre (ICC)
Tallest building
484m / 1,588ft
Tam argues that developments such as these are actually making the Hong Kong market more attractive. 'Institutional or other global investors who track the Hang Seng Index would include more of these big China tech names in their portfolios. This means more inflows into the Hong Kong market,' she says. Singapore and Hong Kong have built somewhat of a rivalry over which will become the preeminent financial hub in Asia. For Daryl Liew, CIO at Reyl Singapore, the recent developments in Hong Kong bode well for the city-state. ‘If you’re a Chinese company, where’s the most natural place to list? It’s been the US simply because you get a cheaper source of funding. You get a huge investor base and good branding, but if you are cut off from the US, where’s your next most natural place to list? Hong Kong is definitely the more logical place,’ he says. Singapore, he says, would be an option, but it means these companies are further away from their domestic market and secondly, there isn’t a pool of other growth names based in Singapore to benchmark against. For Tuan Huynh, CIO Europe and Asia-Pacific at Deutsche Bank, investing in Hong Kong is pretty much business as usual, and he envisages that to be the case for some time. ‘We’re still far away from 2046, when Hong Kong will finally be part of China. I think that until then, there will be ongoing discussion. From my observation, at least, there is currently no major change to investing.’ ‘We haven’t seen any capital outflow. Even with the tensions going on, there is not much to observe. So, Hong Kong still remains, alongside Singapore, the main financial hub in Asia. Nothing has changed in that perspective.
‘I think Hong Kong has enjoyed structural advantages that may have spoiled the city a bit. Being the window for capital, goods and services for China – that’s clearly not a sustainable situation’
Ken Peng, Head of Asia Investment Strategy Citi Private Bank
At a crossroads: How can Japan face its Covid-19 downturn?
JAPAN
The outbreak of the COVID-19 pandemic has led to market volatility not seen since the Global Financial Crisis (GFC).
In past decades, Japan’s three Ds (debt, demographics, and deflation) have been the primary cause of inconsistent market flows. Meanwhile, the global rally fuelled by growth stocks has penalised value investors betting on the famously cheap names in Japan. Then, in the same year, a pandemic broke out and Abenomics architect and prime minister Shinzo Abe resigned, which left question marks on the direction of asset prices and future reforms in the country. The newly elected prime minister Yoshihide Suga will have much to grapple with as the Japanese economy suffers its worst post-war downturn. In the second quarter of 2020, the world’s third-largest economy shrank 28.1% as Covid-19 weighed on businesses and wages. Still, the Japanese economy responded better to the crisis compared to other developed economies. The country’s GDP declined by 7.8% quarter-on-quarter in the second quarter of the year, versus a -9.7% in Germany and -20.4% in the UK. Similarly, death cases were over 1,300 in Japan as of 8 September, compared to the UK’s 41,554, when considering Japan’s population is nearly twice of the UK’s.[1] Responding to the global health emergency, the Japanese government unveiled a $2tn programme of fiscal stimulus after the Bank of Japan decided to allow an ‘unlimited’ money-printing programme by buying bonds and equities through ETFs.
Profiting from deglobalisation
valentina romeo
Despite operating below its potential for decades, Japan remains the world’s third-largest economy. While entering the crisis with strong corporate earnings and balance sheets, Japan has plenty of challenges to overcome.
Grace Tam, CIO at BNP Paribas Wealth Management, however, doesn’t see a catalyst for the Japanese economy to rebound quickly. She believes the country ‘has run out of bullets’ in monetary policy, as years of efforts in money printing and negative interest rates have not worked as expected. In a similar vein, Tam notes the downward path of company earnings. ‘When we look at corporate earnings, the earnings revisions [in Japan] are still going down, while in other countries like the US, Europe, China, and Taiwan are starting to go up. Japan is lagging a bit behind from this perspective,’ says Tam, who remains neutral on the asset class. With little ammunition left for monetary policy, Japan’s only resource was to increase fiscal stimulus, Tam adds. 'Japan increased spending and we await the outcome. Hopefully, fiscal policy is going to be effective, but for now, the economy is suffering.'
JAPAN in a nutshell
40,246.9 usd (2019)
126.3 million (2019)
Tokyo
Japanese Yen (¥)
Nikkei 225
junichi takayama, japan equity investment director
‘Japan increased spending and we await the outcome. Hopefully, fiscal policy is going to be effective, but for now, the economy is suffering.’
Still a leader in sectors such as technology and robotics, Japan has now stronger competitors among other Asian economies such as South Korea, China and Taiwan. But this doesn’t mean innovation will stop. Japan faces the emergency of its aging population, one of the megatrends investors have been favoring over the years. This has led to more investment in robotics, especially in the healthcare sector. Many believe the growing deglobalisation trend that Covid-19 has accelerated could benefit Japan. Since the pandemic outbreak, supply chains have reshuffled and economic interconnectedness has diminished. As a result, Japan has started to work out how to break its dependency on China, attract other trade partners from the West, and produce more internally. Therefore, Tam sees more companies moving back to Japan due to the incentives of the government fiscal stimulus. Japan has already benefited from shifting trade relationships. In July, the UK government reportedly asked Japan to help build its 5G wireless network without China’s Huawei, picking Japanese NEC Corp and Fujitsu instead. ‘This is an example of Japanese companies being the beneficiaries of this deglobalisation trend,’ Tam says. ‘We could invest or we could overweight a couple of Japanese companies that could benefit from this trend. But we still remain in a neutral stance on Japan because there are more bottom-up opportunities for selective companies.’
THE NEW NORMAL: SLOWLY EMERGING FROM THE PANDEMIC Japan is slowly recovering from Covid-19. From the sole focus on containing the virus, Japan is gradually shifting its attention to repristinate the economy. In September, the government kept its economic assessment unchanged for the third month in a row, saying economic activity and consumption were ‘picking up’ from the lows seen during the height of the outbreak. With the improvement of overseas economies and gradual pick up in domestic activities, the Japanese recovery is on track to continue for the rest of the year. However, the process of recovery could still be slower than other countries, with some Japanese companies struggling to keep up after the Covid slump. Figures from the Bank of Japan’s Tankan survey, which tracks large manufacturers, depicts an improvement in economic activity, albeit a shy one. The statistics show manufacturing activity only rose seven points from -34 to -27 in the third quarter of 2020, while expectations pointed to a -23 result. But in sectors such as services, the picture is far more positive. The survey shows that construction was up six points to +21, and retail and communications were up 16 points to +18 and 13 points to +21, respectively.
Source: Worldometer
‘Like Switzerland in the war’: Technology leads South Korea into the future
SOUTH KOREA
South Korea has established itself as a global technology hub with no intention of slowing down, despite going through a global pandemic. South Korea is home to multinational giant Samsung Electronics, which accounts for around one-third of its total market value, and the country is uniquely positioned to stand ahead of its competitors for the years to come. ‘Korea needs Samsung,’ says Ken Peng, Head of Asia Investment Strategy at Citi Private Bank. Peng believes technology will continue to serve as a distinguishing growth source for the country.
Code of conduct
South Korea is poised to continue its leading role in the technology sector against all odds. In fact, investors don’t seem to be worried about its recovery from the crisis
With its mastery in tech, South Korea has been one of the beneficiaries of the use of digital tools in the fight against Covid-19. The country has faced the menace of the disease by using a mass of surveillance data from high-tech tools, such as apps that track the location of arrivals at airports and others that monitor people in quarantine. Authorities and tech firms have also worked on other ‘smart city’ tools to support existing networks of testing and contact tracing across the country. This and prompt testing has made South Korea one of the few countries in the world that has best contained the pandemic outbreak. ‘Covid-19 actually changed the behaviour of everyone,’ says Grace Tam, Chief Investment Advisor, Hong Kong at BNP Paribas Wealth Management. ‘Now, we need more online tools. We need more digital services than ever.’ Within tech, Korea remains a leader in semiconductors, and it is set to grow to compete with other tech champions like the US.
‘Some US players are leaders in semiconductors, but their development is actually delayed. Korea and Taiwan have actually taken advantage of this, and they’re gaining more market share,’ Tam says. The main supplier of semiconductors to China, South Korea could face bumps in the road for its exports in the short term, as the trade war between China and the US continues, Tam argues. She believes, however, that this shouldn’t worry investors too much, since South Korea has other trade routes for semiconductors and contributes to other products, such as smartphones. ‘With the tensions [between the US and China], especially on semiconductors and their sales to China, we may see some significant drop in the near-term, but [South Korea] can offset this by selling to other countries or maybe the US itself.’ South Korea is also leading the race in the development of the 5G platforms. As of June 2020, 5G users made up 10% of the total mobile subscriptions in the country,[1] the highest of any country in the world. In September 2020, Samsung struck a $6.65bn deal with US giant Verizon Communications to help it build a 5G wireless network.
Lotte World Tower
Korea Composite Stock Price Index (KOSPI)
South Korean Won (₩)
51.7 million (2019)
31,762.0 USD (2019)
Seoul
south korea in a nutshell
555m / 1,821ft
‘Now, we need more online engagements, we need more digital than ever before.’
Buy now, reform later
Equity valuations in South Korea have been historically low, and investors have different takes on the reasons behind it. For Peng, the poor governance of many Korean companies has been keeping valuation low for a long time. Although the government worked on reforms in this area, its attention is now all towards getting through the pandemic. ‘The Korean government is really keen to improve corporate governance, with current efforts directed towards those mega-size companies,’ says Tam. ‘It’s not easy, and for this year (2020) especially, with Covid-19, the focus is more on stimulating the economy. Reforms will be delayed.’
‘South Korea has always had a low price to book ratio.’
If you are looking at the price-to-earnings ratio, Korean equities might look expensive, Tam ads, because earnings have become depressed due to Covid-19. But she believes earnings will improve if the country continues to fight the coronavirus as effectively as it has done so far. If investors look at the price to book as a measure, equities look cheap instead, Tam adds. She argues that this might be down to the country’s relations with North Korea. ‘South Korea has always had a low price to book ratio. We tend to think the risk with North Korea or the news flows out of North Korea is noise, rather than anything that we should worry about. ‘But when we receive negative news flows from North Korea, a market correction would follow, but obviously, a few days later it rebounds again,' Tam says.
THE NEW NORMAL: KOREA’S SECRET IN ITS BATTLE AGAINST COVID-19 Korea was one of the first countries to respond to the Covid-19 emergency. It effectively slowed down the spread of the virus in less than a month from its peak. Since the first cases late in January 2020, cases have been declining steadily from a peak of more than 900 in late February to around 100 by the second week of March.[2] How did it do it? Korea was very active in testing, tracking travellers, and monitoring people in quarantine. The key has been in the enormous data collection. The country used everything from credit card transactions to phone location logs and large networks of cameras across public areas. ‘I don’t worry about Korea, in terms of the virus hitting their economy significantly,’ says Tam. ‘We can look at, for example, some department store sales data. It’s actually back to normal (as of August 2020) so that’s why people are already going out and buying things as normal. That’s why they had another wave again, but it was not as serious as it was in the US.’
Source: South Korea's Ministry of Science
Source: Central Disaster and Safety Counter-measures Headquarters
Grace Tam, Chief Investment Advisor, Hong Kong, BNP Paribas Wealth Management
India: The growing giant
India is one of Asia’s most outstanding growth prospects over the long term thanks to its favorable demographic profile. More immediately, investors agree that the country needs to address a number of hurdles, including job creation and banking reform. ‘In a 10-to-20 year time horizon, India will be a very important economy for the world,’ says James Cheo, chief market strategist, Southeast Asia at HSBC Private Banking. ‘In demographic terms, the country’s dynamics are more favorable than those of China,’ he adds.
Youthful tailwinds
citywire writer
Since 2018, the country’s working-age population has grown more than its youthful and elder dependents – a tailwind that has helped other emerging economies. In India, the trend is predicted to last until 2055. This favorable picture is set to fuel the dynamics of upward mobility, where India also has a lot more scope for progress than China. ‘We expect to see more and more of the Indian population moving into the so-called middle class, says Tuan Huynh, CIO for Europe and Asia Pacific at Deutsche Bank Wealth Management.
india in a nutshell
investment opportunities in india
content from pinebridge investments
2104.15 usd (2019)
1366.42 million (2019)
New Delhi
Indian Rupee (₹)
Nifty 50 Index
‘In economic terms, China may be the present, but India is the future’
Currently, around 20-25% of the Indian population could be considered middle class, while in China the figure stands at around 50%, but India is gradually catching up, he adds. ‘In economic terms, China may be the present, but India is the future,’ he says. While there is still political risk, Huynh is broadly positive on the steps taken by Narendra Modi’s government over the last seven years. ‘We think the reform process will continue during his second term, and hence we are also positive for the country’s economic development,’ he notes.
India has emerged from an unprecedented coronavirus lockdown proving that it can be a reliable and dependable...
Consumer slowdown
Fields of growth
‘We are seeing growing demand for tractors and two wheelers. It is a sign that green shoots are emerging in rural areas’
Nevertheless, there are already indications that the rural economy is recovering, Randev points out: ‘We are seeing growing demand for tractors and two wheelers. It is a sign that green shoots are emerging in rural areas,’ he notes. This ties in with a larger national trend: the government has ploughed more than one trillion rupees ($13.6bn) into the economy to support medium-sized entities rather than large corporates. In the wider economy, the ongoing process of disruption and innovation is throwing up a host of opportunities in edtech and healthcare in particular, Randev notes. The latter includes areas such as health-tech, preventative healthcare, and industries catering to better nutrition and healthier lifestyles.
Even more broadly, technology is disrupting attitudes to asset ownership, whether that be autos, furniture, or fixtures. Generation Z is particularly affected: its members prefer to rent, rather than buy depreciating assets, which enables them to remain highly mobile. Cheo concurs with this broad outlook: ‘I think the areas that look interesting again are mainly in technology and digital consumption, as well as parts of the healthcare sector,’ he says. Liew also stresses the disruption theme: ‘Over the years the government’s clumsy handling has created openings in a number of areas. For example one of the reasons a company like telco Reliance Jio Infocomm was able to disrupt things, because they were given free play to disrupt the incumbents and were able to capitalize on that. There’s a lot of potential for new companies to exploit these types of opportunities,’ he says. For non-domestic investors, the difficulty in gaining direct access to capital markets remains a challenge, however. ‘The companies we can invest in are the US ADRs, essentially, so there’s many choices,’ says Liew. ‘We are limited to around 20 or 30 companies. We look at the available ADRs. If we are able to find a good one that we’re comfortable with, we invest in it. Otherwise, we invest via actively managed funds,’ he says.
THE NEW NORMAL: JUMPSTARTING DEMAND The fact that the Covid situation is still not fully under control creates a number of problems for an economy that is so directly geared towards domestic consumption. ‘Higher unemployment, in both the official and the informal sectors, will likely cause lower spending,’ Liew says. ‘That could hurt consumption, especially in the informal sector.’ Consumer confidence is the key, Randev stresses. ‘The government is trying to accelerate job creation to bring consumers back into the market. Until that demand kicks in, even the prospect of further rate cuts and low-cost capital will not be enough to spur growth again,’ he explains.
The comparison with China highlights another structural issue facing India, as Daryl Liew, CIO at Reyl Singapore, points out. ‘One of India’s major problems from an economic standpoint is job creation. China went into the industrialization phase very quickly, which sucked up a lot of the spare labour, but India is different. ‘It’s hard to see how they can industrialize on the level that China did. So far, India’s competitive advantage has been more in the service sector, with things like call centres, rather than industry. So the country needs more labour reform and potentially land reform. I think that if Modi can accomplish that, he can create necessary jobs – but it’s a big challenge,’ he says. In the near term, growth had been slowing even before Covid hit. Well-documented problems in the banking sector, where the legacy problems of non-performing loans continue to loom large, are being addressed by reforms. Those remedies exist, however, alongside slowed national consumption, which was dealt a further blow by the pandemic. ‘Prior to the crisis, a good proportion of discretionary spending came on the back of personal loans,’ points out Munish Randev, founder of the Cervin Family Office. ‘It’s possible the crisis may have prompted a shift toward more risk-averse behaviour with credit. This ‘consumer deleveraging’ could have lasting effects on a domestic consumption-oriented economy,’ he notes.
Tuan Huynh, CIO for Europe and Asia Pacific, Deutsche Bank Wealth Management
Munish Randev, founder, Cervin Family Office
Indonesia’s future foundations
INDONESIA
As the largest consumer market in southeast Asia, Indonesia’s economic growth over the long term will be fuelled by its youthful demographic and growing middle class. But as an economy based heavily on domestic consumption, it faces a number of challenges in the short term, according to local investors. Encouragingly, the government appears to be fast-tracking infrastructure investment projects, partly to offset the consumption slowdown. But this is part of a bigger picture, according to Ken Peng, Head of Asia Investment Strategy at Citi Private Bank. ‘The infrastructure projects will be important over the long term, but it’s also interesting to see a policy dynamic new to emerging markets: a central bank that is directly financing fiscal spending. ‘Essentially, the ministry of finance will issue bonds and the central bank will buy directly. This was unthinkable in the past: you would’ve expected to see an exodus of foreign investment and substantial currency depreciation. But this time, after the policy was announced, there were only a few market jitters.’ The reason this new paradigm has been widely accepted, Peng thinks, is that its theoretical underpinning – modern monetary theory – is already commonplace in developed markets. ‘Investors feel there’s nowhere to hide: you either accept negative interest rates, or you accept the “new normal.” There are very few choices for bond investors at this point and, at least in Indonesia, there’s a substantial carry available,’ he says.
Building bullish
Nevertheless, the economic growth possibilities it opens up for Indonesia are very interesting, Peng believes. ‘Indonesia still has low urbanisation rates. This means more cities are needed. So I think this is an area that global investors should be focusing on more. If the central bank is able to fund infrastructure in a measured way and if the politicians have the right mindset and are able to keep corruption under control, it’s possible that infrastructure plays will advance much more quickly than was previously possible. ‘It’s potentially a bullish story: bridges, roads, railways, and ports are much easier to implement, compared to the bank reform needed in India and China,’ he says. The trickier part is turning this into investable themes, Peng admits. ‘The Indonesian equity market is relatively limited: there are a lot of banks and then mostly traditional industrial plays. There are a few companies directly exposed to infrastructure. Then there are the materials that feed into infrastructure, such as cement and steel. Currently we prefer cement, because the steel sector has overcapacity issues to deal with,’ he notes. Daryl Liew, CIO at Reyl Singapore, is also sanguine about the political backdrop. ‘The current finance minister is very reputable. She has basically regained the positive sentiment of global investors in the way she has been managing trade deficits.
INDONESIA in a nutshell
4,135.6 USD (2019)
270.6 million (2019)
Jakarta
Indonesian Rupiah (Rp)
Jakarta Composite Index
Gama Tower
310m / 1,017ft
‘Investors feel there’s nowhere to hide: you either accept negative interest rates, or you accept the “new normal’’ ’
‘Bridges, roads, railways, and ports are much easier to implement, compared to the bank reform needed in India and China’
‘Indonesia is sometimes seen as one of the more fragile countries in the Asian region. But when you compare balance sheets today with those of the Asian financial crisis – or even those of five years ago – today’s position is much better,’ he observes. ‘The economy is better managed, and because of that the volatility on the currency side has been much more muted,’ he says. Liew agrees that the development catchup play is central to Indonesia’s potential. ‘Our exposure there tends to be via financials and industrials, due to the traditional nature of the equity market. But we are on the lookout for new investment ideas,’ he notes. One area of potential interest is the country’s nascent tech sector, but it has a long way to go as yet. ‘While the tech space is not really investable at this point, it’s encouraging to see a number of interesting startups there. We have gained some exposure to Indonesian tech via Singapore-listed Sea Ltd, which is invested in one of Indonesia’s major ecommerce plays,’ Liew says. The ecommerce theme is also picked up by James Cheo, chief market strategist, Southeast Asia at HSBC Private Banking. ‘E-commerce is where we think the biggest growth and opportunity will be. It also plays into the fact that after the Covid-19 pandemic, we will be in a more connected world. So e-commerce and the associated supply chain – those companies that provide e-commerce to Indonesia and to Indonesians – could do extremely well in the years ahead,’ he says.
THE NEW NORMAL: TRUSTING INFRASTRUCTURE Any consumption-led recovery in Indonesia is being stalled while the general populace remains unconvinced that the coronavirus pandemic has been dealt with. ‘I think it’s a real priority to resolve the Covid-19 situation within Indonesia,’ James Cheo says. ‘It also goes beyond the present crisis, because it’s important how they reconfigure their economy to take advantage of how the post-Covid-19 world will be. To me, that is the main challenge and opportunity for the government in the years ahead,’ he says. In the near term though, the situation remains unresolved. ‘How do government and corporations manage the situation and put measures in place to assure people that it’s safe to go out? That’s the crucial aspect that has to occur in Indonesia before consumption and consumer confidence can return in a strong way,’ Cheo says.
Singapore sheds its safe image
Singapore is known for its uniform year-round temperatures, varying by just a few degrees between the coolest and warmest months. Until recently, its reputation as an investment destination has been similar: a safe, if somewhat uninspiring, place to park capital. However, things are changing in the tropical city-state. A lot of the government’s efforts have been put into the digitisation of small and medium enterprises to improve fintech and foster innovation. Combine this with its role as a healthcare and pharmaceutical hub, and it has all the ingredients to manage the Covid pandemic in an organised fashion. Indeed, ‘Covid-19 management has been extremely strong in Singapore,’ says James Cheo, chief market strategist, Southeast Asia at HSBC Private Bank. ‘The authorities have been proactive in containing the virus, and this has allowed a faster recovery for its consumers.’ He adds that the healthcare and pharmaceutical expertise Singapore has built up will play to its advantage. He thinks this will be true not just in the fight against Covid-19 but also in a post-Covid-19 world where a lot of the technologies and manufacturing capabilities for healthcare equipment come from Singapore. ‘That’s where Singapore is pushing ahead, whether it’s the testing kits or the search for a vaccine – regardless of which company discovers it. I believe Singapore will play a key role in the manufacturing of the vaccines, so there are many avenues where new healthcare technologies will be used.’
singapore in a nutshell
65,233.3 USD (2019)
5.7 million (2019)
Singapore
Singapore Dollar ($)
Straits Times Index (STI)
Guoco Tower
290m / 951ft
'Singapore will play a key role in the manufacturing of the vaccines, so there are many avenues where new healthcare technologies will be used.’
Not everyone is convinced that the government funding will turn into investment gains, as Daryl Liew, CIO at Reyl Singapore, explains. ‘I think it’s still unclear whether the money that has been pumped into biotech in Singapore has paid off, because there’s not been a real investable company that we’ve seen so far.’ ‘In the health-tech space at least, the ones that we see potential in are actually located in North Asia’, he says. ‘There’s a company called Ping An Good Doctor for example, which is in telemedicine. It is listed in Hong Kong, and it’s a Chinese company. That’s a company we have invested in that we think has huge potential. It has done extremely well obviously over the last couple of months, because they do telemedicine.’ From an investment perspective, Liew argues that the Singapore stock market, while relatively developed within the region, has been largely driven by being the regional headquarters for a lot of its neighbouring countries. ‘This leads to a challenging question today. As the other Asian countries develop – as the Thai market develops, as the Indonesian market develops – it’s natural for companies in those countries to list in their own respective stock markets. Singapore faces a challenge in developing our future in that respect.’
Avenues for inflows
Building trust
However, Liew believes Singapore has created its niche in real estate investment trusts (Reits). ‘Singapore was probably one of the first Asian markets to create Reit legislature, which is one of the reasons why our Reit market is extremely well developed. We’ve actually had a number of overseas Reits listing in Singapore.’ For investors such as Grace Tam, this is an appealing market characteristic, especially for more cautious clients. ‘Singapore is not interesting to us for anything related to its economy. We see this as a defensive play, which means that they have a lot of stocks in banks and in property sectors like Reits, and those are high dividend stocks,’ she says. Liew adds: ‘We are probably a victim of our own success here though. Because of the success of the Reit industry, Singapore has unfairly been tagged with being a safe, boring, dividend kind of market. There’s a perception that we don’t have growth.’
'We’re good at dividend, safe, conservative companies, but we’re lacking that growth driver’
‘I think that’s the thing that’s missing in the Singapore market – the growth aspect.’ ‘We’re good at dividend, safe, conservative companies, but we’re lacking that growth driver, which is quite stuck. When you compare Singapore and Hong Kong, Hong Kong has all these fantastic growth names listed there.’ Ken Peng, head of Asia investment strategy at Citi Private Bank sees it another way. Based in Hong Kong, his perception of the merits of both the Hong Kong and Singaporean markets is markedly different. ‘Singapore realised early on that it cannot rely on anyone. So, it initially developed the oil refining business. That became very important. It was Singapore’s lifeblood.’ ‘Then Singapore invested heavily into healthcare. Now that’s become a substantial part of the economy. Now, little-by-little, it is taking market share in financial space, which is the bedrock for Hong Kong.’
THE NEW NORMAL: A PORT IN A STORM The modern state of Singapore, which considers the world its ‘hinterland’, remains in essence a port city. When the coronavirus pandemic dropped anchor, an initial fast and effective response from the government kept new cases low. Its multicultural workforce, however, accelerated the spread of the virus. Singapore's migrant worker population often have to live in cramped dormitories, and by April, clusters of cases connected to those workers were identified. The resulting spike in infection rates was enough to spark public debate on changing living conditions among these communities.
James Cheo, chief market strategist, southeast Asia HSBC Private Bank
Daryl Liew, CIO, Reyl Singapore
Is there light at the end of the tunnel for the Philippines?
Philippines
Prior to Covid-19, the Filipino economy was rocketing along, churning out more than 80 consecutive quarters of growth. [1] Its population of 107 million, median age just 24, had provided one of Asia’s largest potential consumer markets, fuelled by easy credit for both consumers and corporations. Public debt was low – government debt stood at 34.1% of GDP, a full 8% lower than the ‘BBB’ peer median [2] – and physical infrastructure was being addressed. Now? Well, like pretty much every country in the world, the Philippines has taken a pummeling. GDP growth fell by 16.5% in the second quarter of 2020,[3] prompting some analysts to warn of ‘a recession for the ages’.[4] Covid-19 cases continue to rise [5] and overseas remittances, the lifeblood of the Filipino economy, keep on dropping.[6] The political picture doesn’t help matters. President Duterte continues to cause controversy, as seen in the debate over federalism and his influence over the supreme court, and there’s the wider fallout from the US–China trade spat. The blackouts that regularly engulf Manila show that, for all its promise, the Filipino business community still has plenty of basic challenges to overcome. Another key opportunity, James Cheo, , chief market strategist, Southeast Asia at HSBC Private Banking believes, lies in remittances. More specifically, there is a need for companies that can provide a fast, efficient service to those who wish to repatriate their money. Manila is already becoming a hub of digital banking, and banks such as Unionbank and BPI have long been pushing for upgrades to their digital technology. Victor Sison, investment analyst with Willis Towers Watson, echoes Cheo’s sentiments and points to finance and real estate as key areas of opportunity. He cites the Ayala, one of the Philippines’ largest business groups, which recently listed a portion of its real estate business via a Reit, the first in the country. ‘I am interested to see if this rocks the boat, in terms of the financial products available to investors in the future and how other players in the real estate industry will react,’ Sison continues. For those looking for something more traditional, the perennially buoyant agriculture industry remains solid, posting 0.5% growth in Q2 [7] [8] with the added boost of a $400m loan from the Asian Development Bank.
Consistent inconsistency
Of course, the opportunities in the Philippines don’t come without risk. There’s the volatile currency, for a start, not to mention the widening fiscal deficit and negative balance of payments. And then there’s the baffling bombast of President Duterte to consider. The 75-year-old firebrand is consistent only in his inconsistency, as evinced by his constant flip-flopping over the US.[9] And, as Victor Sison notes, this is reflected in a baffling regulatory system, which is subject to regular state intervention. Duterte’s recent decision to unilaterally scrap a basket of water concession agreements (and his threat to their owners that ‘one night, I’ll just arrest you’ [10]) is merely the latest example of his alarming capriciousness. Sure enough, Covid-19 has only served to accentuate these tensions and raised a whole heap of questions which the Philippines has yet to solve. James Cheo asks, ‘How do you de-risk industries within the Philippines… [so] that they are safe for business? ‘It involves many aspects of how a consumer will transact a particular good. It involves digital payments, for example. It involves making hotels safe, so consumers feel that when world travel is back again, they will think that the Philippines is a destination for them. ‘These are things that every country has to do. But more so the Philippines because the cases there are higher compared to other parts of Southeast Asia.’ Despite all the recent turmoil though, the future remains bright for the Philippines. Its young, well-educated and, crucially, English-speaking workforce [11] remains ideally placed for growth, and investors who get in now can find some real bargains ahead of the post-Covid-19 recovery.
philippines in a nutshell
3,485.1 usd (2019)
108.1 million (2019)
Manila
Philippine Peso
PSE Composite Index (PSEi)
Grand Hyatt
318m / 1,043ft
Fun facts
Carabao
National animal
Arnis
National sport
‘These are things that every country has to do. But more so, I think, the Philippines because of the cases that are relatively higher there compared to other parts of Southeast Asia.’
James Cheo, chief market strategist, Southeast Asia, HSBC Private Banking
THE NEW NORMAL: UPWARD STRUGGLE IN THE PHILIPPINES According to analysts at ING, GDP growth in the Philippines will follow a ‘bumpy’ L-shaped recovery.[12] This sentiment is reflected by James Cheo, chief market strategist, Southeast Asia, at HSBC Private Banking. Cheo says the Philippines is ‘going through a tough time in many ways’ and points to the continuing rise in Covid-19 cases across the country, as Cheo explains, this will have a knock-on effect for the Philippines’ consumer-dominated market. ‘If the cases are increasing, people will definitely be cautious and not go out on the street. If Covid-19 is not arrested in a decisive manner so that people feel it’s safe to resume their lives again, you’re going to see fairly subdued consumption.
A league of its own
The rapid progress of Vietnam over the past 30 years has been striking. Transforming from the poorest country in the world into a lower middle income country, Vietnam is a dynamic economy that is ready to establish itself as one of Asia’s most successful stories. Hosting a total of nearly 97 million people, of whom 70% are under the age of 35, Vietnam is set to grow to 120 million people by 2050. With a robust domestic demand and export-oriented manufacturing economy, the country has been able to show resilience and sustain its growth, which stayed at a steady 7% in both 2018 and 2019. As expected, the economic picture of Vietnam in 2020 couldn’t maintain the same standards due to the Covid-19 outbreak. Given its international trade links, the impact of Covid-19 on Vietnam’s exports and tourism has been disastrous. The country has, however, managed to contain the crisis much better than others, thanks to a quick response from authorities. In June, the IMF has confirmed Vietnam’s GDP will only expand 2.7% in 2020 but said it could rebound strongly by 7% in 2021. One of the consequences of the pandemic has been a reshuffle in global supply chains, and Vietnam is set to be a beneficiary of this trend. James Cheo, chief market strategist for Southeast Asia at HSBC Private Bank, says Vietnam is in ‘a league of its own’ among Asian countries. Its young, educated, and cheap workforce creates a strong case for more foreign direct investments to flow towards Vietnam. Cheo notes that many multinationals are relocating their operations to Vietnam, notably South Korea’s Samsung, which already makes over half of the world’s smartphones in the country and accounts for 25% of Vietnam’s total exports.
Freeing up investment routes
Valentina Romeo
After a proactive action against Covid-19, Vietnam is working on its economic rebound. The strong manufacturer and powerful exporter has everything in place to widen its influence and international presence
‘That’s a testament to the technical knowhow of the country. It’s perhaps more cost efficient to manufacture in Vietnam than other regions of the world. That’s an interesting story for investors in the years to come,’ he says. Another sign of Vietnam opening up its borders is the new free trade agreement it established with the European Union, the EU–Vietnam Free Trade Agreement (EVFTA), which came into force in August 2020. This will make Vietnam the second Asian country to have such a deal in pace, after Singapore. With the EVFTA, 71% of Vietnam’s exports to the EU will become duty-free, as will 65% of EU goods shipped to Vietnam. The EU will also cancel over 77% of Vietnam’s textile and apparel exports tariffs after five years from the start of the deal. Other tariffs will stay at 22.7% after seven years. The EVFTA will not only increase Vietnam’s exports to Europe – currently at 15% – but it could also attract more manufacturers from China and other Asian countries. ‘The free trade agreement with Europe would help revive Vietnam’s export market. All these aspects are extremely important. It will help Vietnam achieve its potential,’ says Cheo.
vietnam in a nutshell
vietnam: From paddy fields to Asia’s rising powerhouse
content from vinacapital
2,715.3 USD (2019)
96.5 million (2019)
Hanoi
Vietnam Dong (₫)
Vietnam Ho Chi Minh Stock Index
Vietnam is a country on the rise. It is home to nearly 100 million people – the 14th largest population in the world – and...
‘The free trade agreement with Europe would help revive Vietnam’s export market’
There are still limits, however, to how investors can directly access a country such as Vietnam, experts say. As for all emerging markets, the breadth of investments remains small and therefore requires an accurate selection. Investors such as Cheo start from looking at the economy in general. Within that, he likes the financial sector, such as banks, as well as secular trends, such as tourism. He plays that sector through airlines and hospitality names, as a result of how they managed the pandemic. ‘Domestic travel has improved,’ says Cheo. ‘If we do get normalcy in tourism globally, you’re going to see many more tourists going to Vietnam because of how [well] they controlled the Covid-19 situation.’ With the exposure to banks, Cheo says that investors are also ‘naturally’ exposed to the property sector, a historical growth engine for emerging markets. The growing appetite for Vietnam is also echoed by Tuan Huynh, CIO for Europe and Asia Pacific at Deutsche Bank Wealth Management, who says clients’ demand for Vietnam has increased as ‘it’s supposed to be the next emerging country in line’.
'Vietnam is trying to follow Chinese steps. But when clients ask me, ‘‘How can I participate in this?’’ my answer is always, ‘‘Actually, not much’’ ’
But Huynh notes that the public market space is not yet mature, so many investors will look at private equity or remain primarily focused on China. ‘There’s almost 100 million people [in Vietnam], and it has opened up its borders similarly to China. Vietnam is trying to follow Chinese steps. But when clients ask me, ‘How can I participate in this?’ my answer is always, ‘Actually, not much,’ Huynh says. The lack of strong local companies, as well as the overall corruption risk in Vietnam and Asian economies, still puts investors off, Huynh adds. ‘There is some resistance from foreign investors if they are not a hundred percent sure how safe their investment would be in the respective countries. It might take a while for European or US investors to move more money, or a higher portion of their portfolios, into the Asia one,’ says Huynh. ‘Currently, they are focused mainly on China, because you have, more or less, the best access and also the best way to participate in this Asian growth from a liquidity perspective.’
THE NEW NORMAL: A ‘SERIOUS’ TREATMENT OF THE COVID-19 PANDEMIC The containment of Covid-19 in Vietnam has been much faster and effective than the rest of the region. Since the first case of the disease at the end of January, schools were closed immediately and remained shut until mid-May. By mid-March, anyone entering the country or those who had been in contact with someone infected were put into a 14-day quarantine. The famous tourist city Da Nang completely closed as soon as it had a few cases of Covid-19, recalls Cheo. ‘This shows a certain seriousness to how they treat Covid-19. Because of that, there is certain confidence, at least within the domestic population right now, that the country is safe. They are serious in stopping this pandemic,’ he says. But the strong response to Covid-19 doesn’t mean that the Vietnamese economy hasn’t suffered. Tourism and exports have been severely affected, but domestic consumption is expected to offset the slowdown. Vietnam will have a growth of 3-4% in 2020 compared to 6.5% pre-crisis estimates, according to the World Bank. Depending on Covid-19 disruptions globally, the World Bank and other organisations expect a rebound in the Vietnamese economy. They set their expectations on the basis of the country’s strong fundamentals and its potential to make its mark overseas by embracing technology, which is in high demand by its expanding middle class.
Trouble in paradise for Thailand
Thailand’s announcement that it will reopen its paradise island of Phuket to foreign tourists at the start of October [1] has provided belated good cheer for the beleaguered south-east Asian kingdom, where the tourist-centric economy has taken a pummelling from Covid-19. According to Thailand’s Office of the National Economic and Social Development Council, the economy recorded its worst fall since the last century in the second quarter of the year [2]. Analysts are forecasting a U-shaped recovery, but it’s not clear how long the bell curve will drag along the bottom. Of course, all this adversity and uncertainty will create opportunities for investors. Hotel and real estate stocks are likely to be undervalued in the current crisis, although it’s unclear when or if they will truly start to pick up. For more reliable returns, investors would be wise to turn away from Thailand’s traditional strengths. Despite the government’s plan to entice foreign visitors with a new ‘long-stay’ visa,[3] its state tourism body warns that visitor levels next year may fall to just 15% of their previous levels.
Value in adversity
Tourism certainly isn’t the only string to Thailand’s bow. CIO at Reyl Singapore, says: 'Thailand has created niches in specific industries.’ Healthcare, for example, has long been a source of strength, although Bangkok’s fledgling medical tourism market has been frozen due to coronavirus. The food and beverage sector, meanwhile, has created a number of impressive startups in recent years. The pace of diversification will surely increase now. James Cheo, chief market strategist, Southeast Asia, at HSBC Private Banking points out that ‘tourism could improve [in the wake of Covid-19]’. He says, however, that the interesting question is ‘How would they reconfigure and cope with the new Covid-19 reality?’ ‘We know that there’s going to be a higher, a more indebted world. How would the Thai government deploy their fiscal resources to improve their economic growth prospects?’
A good place for investors to start may be the banking sector. Asked to slash their interest rates by the Bank of Thailand,[4] private lenders are sure to play a central role in Thailand’s recovery. It’s also worth considering the renewable energy sector, which is likely to be a considerable focus of government backing; the Thai government’s latest power development plan strives to increase total renewables capacity by up to 200% over the next 15 years. [5] In tandem with this initiative, Thailand has ambitious plans to become a regional hub for electric vehicles by consolidating its position as Southeast Asia’s biggest automotive hub [6] and a host of international behemoths such as BMW, Nissan, and Toyota. Only recently, Thailand’s Marine Department pledged to create a fleet of electric ferries that promise to turn Bangkok into the ‘Venice of the East’ [7]. Investors may wish to keep an eye on the developments over the forthcoming months. At present, Thailand’s digital sector remains nascent; only around 4% of the country’s stock market is currently composed of technology stocks. However, in the new world of social distancing, innovation is likely to become more important.
thailand in a nutshell
7,808.2 USD (2019)
69.6 million (2019)
Bangkok
Thai Baht
Bangkok SET Index
Magnolias Waterfront Residences Iconsiam
Outrunning instability
There is plenty of cause for optimism. But, if investors want to maximize the opportunity presented by Thailand, there are plenty of hurdles to overcome, too. As James Cheo says: ‘In Thailand’s case, just like in all emerging markets, you have to always watch out for the liquidity of the markets, whether it’s bonds or the equities you buy.’ This problem persists, despite a B100bn ($3.2bn) [8] support fund announced back in March. [9] Perhaps the biggest problem of all is the political structure, described by Daryl Liew as an ‘absolute mess’ and exacerbated by the death of the popular King Bhumibol Adulyadej in 2016. No party is able to retain power for the long term, and this uncertainty parlays into an alarming lack of coherent business regulations. For foreign investors, the rules of engagement could change at any time.
‘If you think about only the domestic part of our economy, we have been trying to get people out from the agricultural business and into the industrial and service sector for almost 20 years. But we didn’t succeed and when Covid hit, we had a problem with the service sector as well’
Jitipol Puksamatanan, director of research allocation, SCBS
Encouragingly, however, the government appears keen to push international investment, as demonstrated by its vision for an ‘Eastern Economic Corridor’. The plan will provide a raft of incentives, including corporate income tax exemption, land ownership pledges, and facilitation of visas and work permits. [10] But despite all these obstacles, the commentators we spoke to remain cautiously optimistic. And with good reason. Even if tourism continues to flatline, Thai companies have long shown themselves to be resilient – they are able to defy the political panorama and make things work.
THE NEW NORMAL: THAILAND'S STRUGGLE FOR REFORM Prior to Covid-19, investors had plenty of reasons to be optimistic. Thailand was more industrially advanced than many of its neighbours (although its output had actually been falling for several months) [11] and its currency was surging against the dollar.[12] Its equities market included star performers such as energy giant PTT and Central Retail, which announced the biggest-ever Thai IPO in February. Now, Thailand is reeling from a double blow. Jitipol Puksamatanan, director of research allocation at Thai security firm SCBS, says that the global lockdown hasn’t just destroyed Thailand’s tourism sector; it has also significantly reduced its export flows. In fact, exports are tipped to contract by 15% over the course of the year.[13] In addition, there are a number of structural problems that long predate Covid-19. Well before the world went into lockdown, Thailand was feeling the effects of a flatlining labour force, an ageing population, and sloppy supply chains that will need to be rewired if Thailand is to meet its development targets. Jitipol Puksamatanan says, ‘If you think about only the domestic part of our economy, we have been trying to get people out of the agricultural business and into the industrial and service sector for almost 20 years. But we didn’t succeed and when Covid-19 hit, we had a problem with the service sector as well.’
[1] Source: Bloomberg, as of 31 December 2019
Disclaimer All investments involve risk, including the loss of principal amount invested. Past performance is not indicative of future results. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. You should also read the prospectus of the investment product for further details, including the risk factors before investing. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. Any views expressed represent the opinion of the manager and are subject to change. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk. We are not soliciting or recommending any action based on this material. In Hong Kong, this document is issued by PineBridge Investments Asia Limited. This document has not been reviewed by the Securities and Futures Commission (SFC). Investors should note that the website www.pinebridge.com and any other website referred to in this documents have not been reviewed by the SFC and may contain information of funds not authorized by the SFC. In Singapore, this document is issued by PineBridge Investments Singapore Limited (Company Reg. No. 199602054E), licensed and regulated by the Monetary Authority of Singapore (MAS). This advertisement or publication has not been reviewed by the MAS. Investors should note that the website www.pinebridge.com and any other website (including any contents therein) referred to in this document have not been reviewed or endorsed by the MAS.
Source for both charts: Citywire Discovery, as at 31 August 2020. Performance is based on total return in USD calculated gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Average manager is the based upon the managers tracked globally in Citywire's Equity - Asia Pacific Small & Medium Companies peer group. PineBridge Investments relates to Elizabeth Soon’s track-record in the sector. Past performance is not indicative of future results. For further information, please see pinebridge.com. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
At a stock-specific level, though, careful analysis is required, particularly given the lack of earnings visibility. ‘The last several months have put enormous strain on companies,’ Soon says. ‘It has become pointless to ask companies about the visibility of their orders, because analysts find it hard to gauge near-term earnings at this point. We avoid trying to chase visibility. Instead, we speak to companies to understand how they are surviving or how they are deploying their cash to increase market share,’ she adds. This approach plays very much into PineBridge’s unconstrained, research-driven investment style and research framework: the team is used to looking at a vast universe of companies and industries well beyond the benchmark. PineBridge has always placed emphasis on establishing the long-term sustainability of business models, and then backed its convictions over a medium to long term time horizon. Soon sees the small cap market as a deep opportunity set for finding overlooked stocks: within the Asia ex-Japan region, 90% of all listed corporations - around 15,000 in total - are small caps.[1] ‘The small cap segment of the market generally displays more unrecognised growth prospects, due to an abundance of choices and mispricing opportunities. Our aim is to find such opportunities in companies that have the potential to become tomorrow’s leaders,’ she says. The company’s proprietary research framework categorises companies based on their maturity and cyclicality in the context of business sustainability, Soon says. ‘We don’t group stocks into heterogenous industries or sectors, but rather take a business activity agnostic viewpoint. By basing the categorisation only on maturity and cyclicality, this approach creates homogenous groupings of stocks that exhibit similar characteristics as well as similar trading behaviour in the market,’ she says.
The good news, she adds, is that once the virus is contained, the pent-up demand is likely to be strong. But the question of when the recovery will happen, or whether it will take the shape of a V, U, L or Nike swoosh is not the main focus for bottom-up stock pickers like PineBridge, who are intent on finding opportunities amidst the volatility. ‘Given our investment approach and long-term horizon, the important question for us is “which companies that were expensive before looked cheap now on value terms, and are coming to us at prices close to where we would want to buy?”’ Soon notes. ‘Ultimately we are asking whether, looking forward three years, these companies will still be trading at the prices we are seeing today,’ she adds. As markets continue to react to short term newsflow amidst the overall uncertainty, Soon and her team continue to focus on companies with strong business models, which they believe have the ability to gain market share and compound capital across market cycles.
As markets continue to react to short-term newsflow amidst uncertainty, PineBridge Investments’ veteran Asia equities portfolio manager Elizabeth Soon focuses on companies that are likely to survive beyond the downturn, rather than those that may benefit from it over the short term.
“We avoid trying to chase [earnings] visibility. Instead, we speak to companies to understand how they are surviving or how they are deploying their cash to increase market share”
This approach has allowed the portfolio to remain relatively stable throughout the course of the pandemic, Soon points out. ‘The top 10 holdings in our Asia ex-Japan small cap portfolio have remained largely unchanged. In recent months, as valuations declined, we have accumulated shares of companies that are already in the portfolio. We have also added new names that we have been following for some time, as their valuations came down to more reasonable levels,’ she notes. This stability is a natural consequence of PineBridge’s investment approach. ‘There are companies in our portfolio that we have held for a number of years already because they continue to deliver good returns and their niche drivers help insulate them from the vagaries of market cycles,’ she says. With the pandemic still spreading, Soon is focused on companies that are poised to survive the crisis and gain market share, rather than those positioned to benefit from the crisis. Soon’s team continue to monitor how companies are recovering from lockdowns, the normalising of supply chains and any pickup in demand. ‘A substantial portion of our portfolio are exporters, so we keep an eye on changes in external demand,’ Soon says. ‘And obviously, containment measures are key: therefore, we continue to monitor government responses in Asia and beyond, as well as the developments in the Covid-19 therapeutic and vaccine pipeline.’ Over the long term, Soon continues to expect fundamental changes from geopolitical shifts. ‘For example, rising protectionism could lead to greater uncertainty. Nevertheless, this could also bring about structural changes in key markets in Asia, which could usher new opportunities for investors,’ she points out.
elizabeth soon CFA, Head of Asia ex Japan Equities
Hear from Citywire Top 30 Female Fund Manager Elizabeth Soon of PineBridge Investments as part of the Citywire Alpha Female study, which looks at representation of women in portfolio management.
The top 30 female fund managers in the world
While the shape of Asia’s recovery remains unclear, on-the-ground company focus and a medium-term horizon remain the best approach to securing healthy returns, according to Elizabeth Soon, head of Asia ex-Japan equities at PineBridge Investments. This approach has allowed her to add to existing holdings or stocks that were on her radar as valuations came down to more attractive levels. Considerable uncertainty remains around the economic situation across the region. In particular, anti-Covid measures have de-railed consumer spending which had become the main growth driver of many economies. ‘The difficulty today is that demand cannot improve until consumer confidence and spending return, and capital expenditures grow again. But this, in turn, is dependent on the success of containment efforts. Consumer confidence will return only when the public threat eases,’ Soon says.
Siddhartha Singh, investment director
[1] The inception date of the PineBridge’s India equity strategy is 1 October 2005.[2]Source: World Bank data, as of end 2019
Disclaimer For Institutional and Professional Investors Only All investments involve risk, including the loss of principal amount invested. Past performance is not indicative of future results. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. You should also read the prospectus of the investment product for further details, including the risk factors before investing. Any views express represent the opinion of the manager and are subject to change. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any re-publication or sharing of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk. We are not soliciting or recommending any action based on this material. In Hong Kong, this document is issued by PineBridge Investments Asia Limited. This document has not been reviewed by the Securities and Futures Commission (SFC). Investors should note that the website www.pinebridge.com and any other website referred to in this documents have not been reviewed by the SFC and may contain information of funds not authorized by the SFC. In Singapore, this document is issued by PineBridge Investments Singapore Limited (Company Reg. No. 199602054E), licensed and regulated by the Monetary Authority of Singapore (MAS). This advertisement or publication has not been reviewed by the MAS. Investors should note that the website www.pinebridge.com and any other website (including any contents therein) referred to in this document have not been reviewed or endorsed by the MAS.
With close to 15 years of experience investing in India [1], the PineBridge team has held firm on its fundamental, bottom-up investment approach in stock selection through market cycles. Into the pandemic, the team stress-tested each company in the portfolio for a scenario of prolonged period of recovery after the lockdown. ‘We found that none of the holding companies would face any balance sheet issues even assuming extended lockdowns,’ he says. Yet even stronger companies are not taking any chances, raising a remarkable amount of capital in the domestic equity market in recent months to fortify their war chests. If the crisis is a winner-takes-all race, this could help them to further break away from the pack. Singh believes it can also have a multiplier effect on the economy. ‘The availability of risk capital to deserving companies in times of distress should greatly aid in the recovery of the economy. The confidence shown by equity investors in supporting businesses during these difficult times stands in contrast to the banks’ reluctance to lend money. We expect that once balance sheets have sufficient equity capital, bank credit will accelerate, leading to a sustained revival in the economy,’ he says.
Source: Citywire Discovery, as at 31 August 2020. Performance is based on total return in USD calculated gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Average manager is the based upon the managers tracked globally ex US in Citywire's Equity - India peer group. PineBridge Investments relates to Elizabeth Soon’s track-record in the sector. Past performance is not indicative of future results. For further information, please see www.pinebridge.com/funds.
India’s vast rural economy is already percolating, supported by government stimulus and good monsoons critical to agriculture. Singh says one industry that should benefit from a resilient rural economy are the two and three-wheeler manufacturers. ‘The reason is simple: India’s average per capita income of around $2,000 makes cars unaffordable for most’[2] he says. Moreover, secular trends are supportive of growth in Indian industries. As large global manufacturers sought to diversify their supply chains from China following the US-China trade war, India is positioning itself as an alternative host in this relocation trend. Add to that the exceptional underlying dynamics of the Indian economy, with a young and expanding labour force, strong infrastructure spending and one of the largest fast-moving consumer goods and durables markets in the world. While the Covid situation is not yet fully resolved, foreign investor flows have made a strong comeback in recent months. Singh notes that the market continues to offer opportunities particularly for those with the flexibility to pick stocks across all market capitalisations without being constrained by benchmark. ‘In some cases, we have found interesting stocks coming down to more attractive valuations,’ he says. Bloomberg noted that PineBridge beat 98% of India-focused fund peers in the 12 months to 26 August 2020. Long past the pandemic, Singh believes the changes adopted by companies in India during this time will have a long-term impact on profitability. ‘Companies that embrace digitalisation, are more cognizant about reducing costs and more adept at adapting to this change will enjoy the pricing power and market share,’ he says. “There is no shortage of opportunities in India, and the only thing needed here is prudence and patience,” he says.
“In some cases, we have found interesting stocks coming down to more attractive valuations.”
India has emerged from an unprecedented coronavirus lockdown proving that it can be a reliable and dependable partner to the world, says Siddhartha Singh, investment director, Asian Equities at PineBridge Investments. “India not only supplied essential medicines for the pandemic, but also took care of global technology needs,” he says. “Indian IT service companies were true champions as they moved over most of their employees to work from home and ensured the smooth delivery of services when the world’s dependence on technology increased manifold. There was no playbook for this, yet when faced with a crisis of this magnitude, Indian IT companies delivered. Such conduct in the face of adversity highlights India’s unique role in key industries, and should help raise the global stature of Indian companies in general.” Tough periods have a way of separating the wheat from the chaff, and putting fundamentals to the fore. “When there’s a crisis, like the one we’re in now, focusing on high-quality companies with unique competitive advantage, outstanding management, and trading at reasonable valuations becomes critical because these are the companies that are likely to continue to strengthen their positions and expand market share even in difficult times,” Singh says.
Over the past decade, China’s equity markets have undergone a significant transformation, deepening and expanding. Consider the example of the health care sector. There was a time when we could only invest in a handful of health care product distributors. Now we can invest in a broad range of different types of health care companies. Increasingly, innovative drug makers, contract research organizations (CROs) and high-end medical equipment manufacturers and suppliers are also represented in our investment opportunity set. As China’s economy has changed and evolved, we find the quality of earnings streams coming out of publicly listed company improving. We also find that sentiment towards Chinese equity is generally more positive because business activity has resumed more quickly in China than in other parts of the world.
Overall China’s long-term prospects continue to be positive as the economy shifts from an export-led to a consumption and services-led model. We believe some companies are better positioned to grow over time by capitalizing on this economic transformation and China’s expanding middle class consumption. The expansion of consumer sectors such as information technology, communications and light industrials is an obvious example. There’s outsized growth in these emerging companies and as an active investor, you can be ahead of this curve. In my experience, investors often underestimate scale as a competitive advantage in China when it comes to consumption and services. Companies that enjoy dominant positions have access to a vast domestic market. Online shopping, for example, continues to be a growth sector. The pandemic sped up adoption of online shopping, but growth in the sector is fundamentally just a continuation of a longer trend. E-commerce platforms continue to broaden their reach into less developed urban centers, often referred to as lower tier cities, tapping into the next large cohort of consumers entering the middle class.
Near-term risks to China’s economy remain. While domestic consumption primarily drives China’s economy, China is also part of the global economy and maintains a global export presence. Thus, the pace of global recovery affects China’s growth in the near term may pose a risk to shorter term economic developments in the country. Taking a longer-term view, we remain optimistic about China’s ability to grow its economy over the next three to five years, especially in those sectors driven by services and innovation. As the global economy slows, we remain optimistic about the long-term growth potential of Chinese equities. From a public health perspective, China has flattened its curve of new cases COVID-19. Fiscal and monetary stimulus, while incremental, remains supportive. Interest rates remain positive, giving China’s central bank room to maneuver. In the private sector, many innovative sectors within China continue to experience rapid growth.
It helps to have boots on the ground. Insights from our analysts in China helped us understand very quickly how seriously the Chinese government were taking the virus. One advantage is that we have decades of experience investing in China and we know the companies we invest in well. We have followed them for years and know the management teams, so it’s fine to have virtual company meetings this year. In addition, our local analysts can conduct site visits and report on local trends. What is more important is to keep an open mind and be disciplined about price. China continues to change rapidly and the stock market is volatile. Market corrections can be very fierce, so understanding when stocks are overvalued and when you should be selling them is critical.
Year to date, both U.S. and Chinese equity markets have shown considerable resilience. What accounts for the relative strength of Chinese equity prices?
Where do you see the big opportunities for investors in China in the years ahead?
What risks should investors keep in mind?
How do you select individual stocks?
Investments involve risk. Past performance is no guarantee of future results. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Important Information Matthews Asia is the brand for Matthews International Capital Management, LLC and its direct and indirect subsidiaries. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information. The views and information discussed herein are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. This document does not constitute investment advice or an offer to provide investment advisory or investment management services, or the solicitation of an offer to provide investment advisory or investment management services, in any jurisdiction in which an offer or solicitation would be unlawful under the securities law of that jurisdiction. This document may not be reproduced in any form or transmitted to any person without authorization from the issuer. In the United States, this document is issued by Matthews International Capital Management, LLC. In Singapore, issued by Matthews Global Investors (Singapore) Pte. Ltd. (Co. Reg. No. 201807631D). In Hong Kong, this document is issued by Matthews Global Investors (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong (“SFC”). In the UK, this document is issued by Matthews Global Investors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority (“FCA”), FRN 667893. In the UK, this document is only made available to professional clients and eligible counterparties as defined by the FCA. Under no circumstances should this document be forwarded to anyone in the UK who is not a professional client or eligible counterparty as defined by the FCA. This document has not been reviewed by any regulatory authorities. ©2020 Matthews International Capital Management, LLC
Andrew Mattock, portfolio manager
By Shigeru Aoyagi, nikko am Japan Value Chief Portfolio Manager
This presents long-term opportunities for value investors in Japanese equities, despite challenges in the near term. The current market crisis has caused a massive demand side shock and therefore it is not easily comparable with the GFC. Furthermore, the Growth-Value spread, which had already been widening due to the sharp decline in long-term interest rates and the fact that abundant liquidity had made it easier to justify higher premiums on growth stocks, reached historical levels during Q1 2020. There has only been one other time over the past decade where we have seen value underperformance on the scale of these past few months, and we are confident that these distortions will be temporary. Over the longer term, we expect the Japanese equity market’s attractive valuations and a number of structural themes to favour value investors.
Japanese equities are undervalued
Near-term challenges bring long-term opportunities
Japanese equities are significantly undervalued relative to their peers in other major markets. Furthermore, the current earnings yield for TOPIX is at a historical high while the P/B ratio is at its lowest level since the GFC and the earthquake and tsunami of 2011. Since 1985 a value approach in Japanese equities has delivered superior performance relative to growth. We believe the current underperformance of value will be short lived and this adds to our conviction that now is an opportune time to embrace a value investing approach.
The outbreak of the COVID-19 pandemic has led to market volatility not seen since the Global Financial Crisis (GFC). Governments around the globe have had to impose measures restricting the movement of people in an attempt to curtail the spread of the virus and this has led to severely disrupted economic activity. There are no assurances that the Japanese economy will pick up where it left off before the pandemic; with the demand-side heavily affected, we do not expect consumption to normalize any time soon and a quick “V” shaped economic recovery appears unlikely.
Source: Bloomberg
Source: FactSet, Nikko AM
In addition to the attractive valuations, we highlight three structural themes which we believe favour Japanese equities. Ongoing corporate governance improvements: More companies are focusing on value creation and capital efficiency. We are seeing ROE improvements along with increasing shareholder returns. As an example of the structural change, the number of companies employing takeover defense measures continues to fall. Demand for new technologies: Many Japanese companies offer promising and monetisable solutions in areas such as 5G, IoT, EVs and MaaS (mobility as a service), environmentally-friendly materials and hydrogen energy—all vital building blocks for future social infrastructure. Already, demand from manufacturers of 5G base stations and mobile phones is increasing, with further demand expected across these transformative technological platforms. Asia now part of Japan’s domestic demand: Japan is increasingly interlinked with Asia, the world’s fastest growing region. Yet value opportunities are often overlooked as the Japanese equity market is still under-researched despite the increase in Japanese companies benefiting from this connectivity to Asia.
Structural themes supporting Japanese equities
While the above-mentioned themes will act as a tailwind for Japanese equities in 2020 and beyond, we believe that an active value approach works best in capturing evolving investment opportunities. The broader Japanese equity market is under-researched, so applying a time-tested contrarian value approach to proprietary on the-ground research is critical to long-term outperformance, in our view. Examples we uncovered include: Nintendo The well-known gaming industry brand is increasingly providing societal value in helping people feel connected through family-friendly games during turbulent times. The company has seen a rise in the ratio of sales from downloads of highly profitable games, an increase in paying users of the Nintendo Switch Online platform and greater brand recognition in China. The runaway success of its software sales has created stronger demand for its hardware. Boosted by this software-hardware synergy effect, the company’s stock surged when the market plunged in Q1 2020 and saw profits increase 41% year-over-year. We believe investors in both Japan and abroad are only just beginning to recognise the potential for Nintendo’s share price to be re-rated on the strength of its compelling intellectual property and strong business fundamentals. Nitto Boseki A leading Japanese manufacturer of high-end glass fibre used in printed circuit boards. After a round of structural reforms, the firm is now approaching a new phase of earnings growth. The company is increasingly benefiting from its high heat resistance and insulation products that feature prominently in 5G-related fields. Nitto Boseki also stands to benefit from its role as a manufacturer of antibody test kits with demand for such products increasing due to the COVID-19 pandemic.
Value opportunities
Uncovering attractive value opportunities that can deliver stable excess returns will continue to require careful bottom-up research from experienced investment professionals. We believe that an important catalyst for the market to re-evaluate an undervalued stock is efforts by the company to have positive social impact; as such, ESG factors have always been incorporated as part of bottom-up company research. Such efforts allow for the discovery of undervalued Japanese companies with the potential for positive impact on society and enterprise value.
Summary
Proven track record from an experienced team
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With an investment universe of 3,700 companies, the size of the Japanese equity market requires dedicated coverage that Nikko AM has the scale to provide. Headquartered in Tokyo since 1959 with over £160 billion in AUM and £65 billion in Japanese equity investments, our investment teams are well placed to assist you in navigating the world’s third largest economy. The £3 billion Nikko AM Japan Value strategy has been captained by the same Chief Portfolio Manager since 1996, and the strategy is available through a range of UCITS vehicles. Since 2007, Nikko AM’s Japan Equity Investment Team has been a PRI signatory and has consistently received an A+ rating. ESG is critical to the firm’s fiduciary principles and forms the core of its investment values and corporate activities. Learn more about Nikko AM’s Japan Value strategy: EMEAenquiries@nikkoam.com
VinaCapital: Enabling Investors to Participate in Vietnam’s Growth for Two Decades
Andy Ho, Managing Director, CIo
Source: VinaCapital, Bloomberg. VinaCapital Vietnam Opportunity Fund (VOF) vs Vietnam Index, 10-year annualised total return (%), to 30 September 2020.
VinaCapital’s mission is simple: “To enable our investors to prosper by capitalising on Vietnam’s rich opportunities”; and it has been doing that for nearly 20 years by providing international investors a wide range of ways that enable them to participate in Vietnam’s vibrant growth story. Today, with over USD3 billion in assets under management, VinaCapital is the only investment management company offering investors a range of products and investment structures across all asset classes. Its key products available to UK and/or European investors include:
The VinaCapital Vietnam Opportunity Fund (VOF), a London Stock Exchange-listed FTSE 250 company, and the only Vietnam-focused, closed-end fund investing in listed and private equities. Launched in 2003, VOF’s unique strategy has enabled the fund to deliver superior returns to shareholders and outperform the Vietnam Index since inception. The Forum One – VCG Partners Vietnam Fund (VVF), a Luxembourg-domiciled, UCITS-compliant open-ended fund that invests in listed equities across Vietnam’s growing stock market, which consistently records higher earnings growth compared to its regional ASEAN peers. Vietnam Access Fund (VAF), invests in listed equities, and focuses on small and mid-cap stocks that are not readily available to international shareholders due to foreign ownership restrictions and other market limitations. VinaCapital VN100 Exchange Traded Fund (FUEVN100), which seeks to replicate the performance of the top 100 largest and most liquid stocks on the Ho Chi Minh City Stock Exchange and has the lowest tracking error to the Vietnam Index of all Vietnam market ETFs.
• • • •
VinaCapital also manages a number of segregated mandates for institutional investors, as well as private funds and joint ventures. The VinaCapital team is comprised of a diverse mix of individuals with international and local experience, who use their extensive local networks to identify investment opportunities not available to the general public. With more than 150 professionals located in Ho Chi Minh City, Hanoi, and Singapore, VinaCapital is also among the largest employers of qualified CFAs in the country. The group adheres to international standards of management and governance and ESG plays an important part in the investment and monitoring process. It encourages and works with its portfolio companies to help them improve their practices and policies. VinaCapital is a signatory to the UN-backed Principles of Responsible Investing. To learn more about how VinaCapital’s funds are the right investment products for your portfolio, please visit vinacapital.com or contact ir@vinacapital.com.
© 2020 VinaCapital Fund Management JSC (VCFM). All rights reserved. The information herein is based on sources believed to be reliable. With the exception of information about VCFM, VCFM makes no representation about the accuracy of such information. Opinions, estimates, and projections expressed in this report represent the current views of the author at the date of publication only and are subject to change without notice. VCFM has no obligation to update, amend or in any way modify this article or otherwise notify a reader thereof in the event that any of the subject matter or opinion, projection or estimate contained within it changes or becomes inaccurate. Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or to sell any securities or any option, futures, or other derivative instruments in any jurisdiction. Nor should it be construed as an advertisement for any financial instruments. Officers of VCFM may have a financial interest in securities mentioned in this report or in related instruments. This article is prepared for general circulation and for general information only. It does not have regard to the specific investment objectives, financial situation or particular needs of any person who may receive or read this article. Investors should note that the prices of securities fluctuate and may rise and fall. Past performance, if any, is no guide to the future. Any financial instruments discussed in this article may not be suitable for all investors. Investors must make their own financial decisions based on their particular financial situation and investment objectives.
Vietnam is a country on the rise. It is home to nearly 100 million people – the 14th largest population in the world – and they are young, educated, and eager to work and succeed.Vietnam’s economy has consistently ranked as one of the fastest growing in the world, with GDP posting a CAGR of 6% over the past five years. Indeed, it is one of the few countries expected to post positive GDP growth in 2020 in the aftermath of the COVID-19 pandemic.
Demographics is just one reason why a growing number of global companies are moving to the country. With its low labour costs (half that of China), improving infrastructure, and aggressive development policies, Vietnam is quickly becoming the new workshop for the world as a manufacturing hub for goods ranging from furniture and footwear to home appliances and mobile phones. The steady flow of Western and Asian companies moving operations to Vietnam is set to accelerate with Apple and its contractors joining the likes of Samsung and Intel, both long time investors in the country. Vietnam is also party to more free trade agreements than any country in the region, including the recently signed EU-Vietnam Free Trade Agreement that will remove most tariffs and strengthen intellectual property rights. Vietnam’s government – among the most stable in the region – has also successfully implemented economic reforms that have created an attractive business environment for foreign capital that in turn is creating sustainable growth that is transforming the lives of the Vietnamese people.
Vietnam’s middle class of nearly 33 million people is expanding thanks to new work opportunities and rapid urbanization, creating ever-growing demand across all consumer sectors; from property and construction materials, to consumer goods and services.
Shigeru Aoyagi, nikko am Japan Value Chief Portfolio Manager
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What risks should investors keep in mind in today’s markets?
How do you select individual stocks to minimise risk?
In our view, the recovery is still at a nascent stage. Unemployment remains elevated, and the risk of a second wave of infections is unabated. Furthermore as the largest manufacturer in the world, China is likely to be affected by any slowdown of the global economy. There are however clear signs that the tide is turning, and that this turnaround is sustainable. China has done a better job of flattening its curve of new infections than any other large economy, and the latest economic figures are certainly encouraging. Ultimately, we feel China still has considerable dry powder in its arsenal of stimuli, and long-term secular growth remains a viable ambition. While additional volatility could lie ahead, the long-term prospects for Chinese companies with strong competitive positions remain attractive in our view.
The pandemic has enabled some strong players to become even stronger and gain market share. The ongoing U.S.-China trade tensions have also provided a boost to certain sectors. In areas where China aims to become more self-reliant, for example in chip technology and semiconductors, stock prices have risen considerably. Overall China’s long-term prospects continue to be positive as the economy shifts from an export-led to a consumption and services-led model. We believe some companies are better positioned to grow over time by capitalizing on this economic transformation and China’s expanding middle class consumption. The expansion of consumer sectors such as information technology, communications and light industrials is an obvious example. There’s outsized growth in these emerging companies and as an active investor, you can be ahead of this curve. In our portfolio, we aim to identify current or future market leaders across sectors at attractive valuations, and we are happy to move up and down the market-cap spectrum to secure them. We pride ourselves on securing long-term quality across our portfolio, looking for consistent leaders rather than shooting stars, and we seek to deliver alpha in both up and down markets using a bottom-up approach. The Fund is not overly thematic. We invest across the board and this approach has served us well. By maintaining a relatively concentrated portfolio, we feel we can maximise our research depth and conviction while minimising the risk of stock selection mistakes.
It’s a high-conviction portfolio: we invest in a core of quality stocks, based on close observation of their ability to offer growth at a reasonable price, their competitive advantage, their high operational management performance and the long-term sustainability and repeatability of their cashflows. Approximately 80% of our portfolio is invested in long term sustainable growth companies which demonstrate cashflow predictability. The remaining 20% is invested in more tactical and cyclical names, including areas of the market where there is less predictability but more immediate growth. One of our core principles is that you cannot treat every stock the same. Some sectors, like consumer discretionary, lend themselves to longer-term investment. Other areas of the market give us a shorter prediction window. When we look at these sectors, we invest based on shorter-term horizons.
We seek to identify the best opportunity in each area. Once we have this shortlist we will whittle it down to 35-45 stocks. We examine each individual case on its own merits and look across sectors to identify the right opportunity. We focus on relative attractiveness, the impact on the portfolio’s objective, style and market-cap. We ask whether it offers the ability to participate in an area not already represented in the overall portfolio. We seek to manage the portfolio to a target beta between 0.95 and 1.05. We believe this approach eliminates potential sector bias and allows us to generate alpha consistently.
ESG is another way of looking at a stock and allows us to explore different types of risks and opportunities. There is some good sell side research about factors not covered by traditional analysis. It’s important, however, to supplement external research with your own analysis. In our experience, corporate governance aspects are widely covered, but there is often less focus on social and sustainability issues, for example companies’ ability to cope with privacy and data collection laws, or more China-centric issues, such as water usage and general pollution levels. The Chinese government is interested in regulating environmental issues, so companies that are heavy polluters are likely to be penalised. In our analysis we focus on factors that we consider “core” to understanding the sustainability of revenues, cash flows, and profits–regardless of what label may be ascribed to this analysis.
The portfolio benefits from our extensive individual and collective investment experience in China. As of December 31, 2019, Matthews Asia manages $7.5 billion in China equities across the firm’s single country and regional equity strategies, $1.46 billion of which is invested in China A-shares through both our QFII and Stock Connect programs. The firm launched its first dedicated China strategy in 1998 which I took over as Lead Manager in July 2015. Our team had decades of China investment experience. I have been investing in China for over 20 years, my Co-Manager Winnie Chwang has over 16 years of experience. Together we manage over $1.5 billion in Chinese equities (Data as of 30 June 2020). Our team also includes one Research Analyst based in Shanghai, and is further supported by three dedicated China specialists. As active investors, we travel regularly to the region to meet with companies on the ground, and leverage the research efforts of our broader 40+ member Matthews Asia investment team.
The value of an investment in the Fund can go down as well as up and possible loss of principal is a risk of investing. Investments in international and emerging market securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. The Fund invests in holdings denominated in foreign currencies, and is exposed to the risk that the value of the foreign currency will increase or decrease. The Fund invests primarily in equity securities, which may result in increased volatility. Investments in a single-country fund may be subject to a higher degree of market risk than diversified funds because of concentration in a specific country. These and other risks associated with investing in the Fund can be found in the Prospectus.
Is China’s post-COVID economic recovery progressing as expected?
Why has the strategy thrived in these challenging times?
What distinguishes your investment approach?
What role does ESG play in your Fund?
What China experience does Matthews Asia bring to the portfolio?
Risk Considerations
Andrew Mattock, portfolio manager of the Matthews China Fund, explains how the portfolio is thriving in spite of the headwinds buffeting its core market
“The pandemic has enabled some strong players to become even stronger and gain market share”
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Investing in China’s Leaders at the Right Price
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Put simply, we understand ‘sustainability’ to mean the durability of a company’s business model over the long term. To put it more succinctly: ‘what makes a great company stay great?’. The combination of empirical research and our own experience as investors has led us to believe that sustainability hinges on two key features. Only companies that are run a) for the long term, and b) with regard to all stakeholders, will be able to maintain above average growth and returns. However, the market tends to be poor at long-term forecasting, rarely looking more than a few years out. Analysts also struggle to make sense of and value non-financial factors because they do not fit neatly into an Excel model. This means the market often fails to identify or appropriately value those companies that can consistently deliver “supernormal” growth and returns. This offers an opportunity for investors such as ourselves. But finding these special companies, and deciding which ones to invest in, is not as simple as using third party sustainability ratings. Third-party reports can be a useful input for our analysis, but there are serious shortcomings that mean they should be used with caution.
What are we looking for?
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