Finding value in Asia with contrarian investor Will Lam
Fund manager Will Lam of Elite Rated Invesco Asian sits down with Darius McDermott to discuss...
Last year was not a good one for Far Eastern equities. As trade-wars escalated between the US and China causing uncertainty and raised tariffs, and the dollar remained strong as US interest rates rose, the stock market suffered losing 9%* of its value in sterling terms.
As recent data from China suggests the economy continues to slow, what does 2019 hold in store for the asset class? We garnered the view of some Elite Rated managers and found out where they are finding opportunities.
“The economies in Asia overall are in good health,” commented co-manager, Edmund Harriss. “Asia has, on aggregate, been lowering its debt burden since 2015 and national current accounts, with the exceptions of India, Indonesia and the Philippines, are now in surplus.
“Macroeconomic worries may well persist into 2019. But I believe the region has the resilience to face the slower growth, which is becoming evident among the export manufacturers of north Asia.
With a ‘one-in, one-out’ philosophy, the team have to be truly convinced about a new company’s prospects to make changes to the portfolio. In 2018 they made just two buying Corporate Travel Management in Australia and Public Bank in Malaysia. To make room for these stocks they sold Relo Group in Japan, whose stock price had tripled since purchase, and LPN Development in Thailand, which had been less successful, as falling land prices had squeezed the margins of the Bangkok apartment developer.
“ Corporate Travel Management specialises in providing business travel services,” said Edmund. “Its customer offering is more expensive than competitors, but the overall travel cost savings outweigh the fees. North America is now its largest market accounting for 40% of its revenue. Australia contributes 30%, while Asia and Europe contribute 15% each.
“Public Bank is our first Malaysian holding since 2016. Malaysia has had a tumultuous year in political terms, with the election defeat of a party that has held power since 1957. But Public Bank’s profitability, capital and credit quality ratios have all been stable and dividend growth has been around 6% per annum over the past five years, rising to 11% last year.”
Manager William Lam says that the time to buy Asia is in times of crisis. “Trade wars and China slowdown fears have led to the market being cheap,” he said. “The chances are that now is a good time to buy, because markets are overly worried and have sold off accordingly.
Investors still need to be selective however. “The China slowdown is not an insignificant event though,” he said. “Earnings will decline and fears will spread. There is the potential downside from a potential revaluation of the Chinese currency, as well as further trade wars and no stimulus. This combination would lead to the market falling further. However, I believe the recent sell-off has priced in much of the bad news already.”
William’s largest country weighting in the fund is South Korea. “The South Korean stock market has been very resilient to the concerns over North Korea,” he said. “Instead it is almost entirely driven by fundamentals, earnings and consumer spending.
The South Korean government is also quite populist and socialist, which is hurting the economy. But this has led to valuation anomalies. As a value-investor, this is a situation that suits William.
Matthews Asia investment team recently travelled to Vietnam to assess the potential production relocation activity related to the US-China tariff war.
Sriyan Pietersz, investment specialist said: “We came away with the impression that Vietnam is seeing a rising tide of enquiries regarding either contract manufacturing for China-based companies or outright relocation.
“In many instances, this relocation activity pre-dated the current tariff war. Instead it has been driven by rising costs in China and less-convenient inland locations. Vietnam’s attractive tax privileges, when combined with extra tariffs on Chinese products, are helping to clinch the deal for some manufacturers.
“A shift in supply chains and manufacturing to Vietnam, followed by Thailand and Malaysia (as two other countries in Southeast Asia with relatively deep supply chains) seems poised to accelerate incremental foreign direct investment flows to Southeast Asia.
“We expect it to also boost investment and increase exports, following nearly two decades in which the focus was on China. This trend is unlikely to change even if a US-China trade deal is struck, as multinational corporations will want to diversify their production risk. Consumption should also benefit from increased manufacturing activity, as jobs are created and incomes rise.”
*Source: FE Analytics, total returns in sterling from 1 January – 31 December 2018