360. The hidden strength of Asian markets

12 June 2025 (pre-recorded 10 June 2025)

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[INTRODUCTION]

Staci West (SW): Welcome back to the Investing on the go podcast brought to you by FundCalibre. Rising US debt and shifting global dynamics are pushing investors to re-evaluate their equity exposure. In this episode, we explore why Asian markets may be poised to benefit from this change.

James Yardley (JY): I’m James Yardley and today I’m joined by Edmund Harris, manager of the Guinness Asian Equity Income Fund. Edmund, thank you very much for joining us today.

Edmund Harriss (EH): Thank you very much, and thank you very much for inviting me on.

[INTERVIEW]

JY: Now, Edmund, I know you’ve been writing some interesting things about US debt at the moment. So how do these kind of rising US bond yields and the growing deficit in the US, what impact is that having on Asian markets and your portfolio?

EH: Yeah, well, I think the first place to start is looking at what that is going to do for US markets and the way investors are allocating. As a consequence, the rising US deficit, the spending gap is roughly $700 billion at the moment. They raise about $5 trillion in tax. They spend about $5.7 trillion. So they’re having to borrow $700 billion to fund that gap, but they’re also having to borrow a further $900 billion to pay the interest on that debt. And both the deficit and the interest on that debt are increasing. So this creates a significant challenge because to reverse that requires contractionary policies.

The US has grown very quickly over the last 10, 15, 20 years, driven by consumption, driven by the ability to spend beyond their means. And this is now coming to an end. So the implication is that US equities are going to find it harder going in an economy that is coming under pressure where fiscal policy is going to need to contract.

And with valuations in the US looking very stretched at at over 22 times PE or an earnings yield of about sort of 4-4.5%. That means investors are gonna look elsewhere. And Asian markets are looking by and large, pretty cheap, certainly relative to their own histories. And also in absolute terms, so the effect for Asian markets really is, and as well to Europe, is investors are now going to revisit their US allocations and they’re going to be looking at opportunities elsewhere. And so that’s where I think the greatest benefit to US will come from from this.

JY: Yeah. And we’ve also seen weaker US dollar as a result of some of those concerns. I mean, how does the weaker US dollar typically affect Asian economies and your portfolio?

EH: Well, the weakening US dollar is really a symptom of what we’ve just been talking about on debt and deficit. If the US is no longer that safe haven for value then clearly, you’re starting to look elsewhere for other stores of value. And so the weak US dollar provides for Asian economies the opportunity to lower their interest rates because their currencies are appreciating. So therefore they don’t need to keep interest rates high to keep the value of their currencies stable, their currencies are appreciating versus the dollar. And so their scope to reduce their interest rates. And I think from the point of view of dividend paying companies, those businesses that are generating revenues and profits in non-dollar denominated currencies and are paying dividends in those non-dollar denominated currencies, well those become more valuable. So I think that’s where I think international diversification is starting to look rather more attractive.

JY: Yes. And are we seeing Asian countries sort of appear as that safe haven, or at least as a very strong alternative to the US for so long? Of course, equity markets has all have all been about the US but we we do are seeing perhaps some signs of money moving elsewhere. Are you seeing that as well? I mean because of course there are concerns about China as well, obviously not being a democracy and some concerns over Taiwan. Can Asia really pick up that mantle I guess from the US?

EH: I think they can pick up more of a mantle than they have in the past. There’s been this perception and reasonably that Asia is a developing or an emerging region, but I think it’s also worth bearing in mind that Asia is a creditor region. It is a holder of net foreign assets, whereas America is a debtor, it owes and it owes money to the Middle East and it owes money to Asia. And when we look across the region most countries are running current account surpluses, right? Trump is always going on about the current account deficit in the US that, you know, that is the flip side.

So we’ve got surpluses in Asia, we’ve got banking systems that are well capitalised. Loan to deposit ratios are less than a a hundred percent. It’s sort of pursuing an orthodox monetary policy from a top down perspective, the region looks very stable.

And when you look at somewhere like China, yes, we know that there is a lot of debt within that system just as there is in America, but the interest rate on Chinese debt is about 1.5-2%, whereas in America it’s moving up towards 4.5%. And the other big difference is that all the Chinese debt on 99% of it is held domestically, whereas about 40% of US debt is held by overseas investors. So therefore they are much more in control of their own destinies. They don’t owe outsiders huge amounts of money, and the system is not heavily overloaded.

So therefore, when you start looking toward Asia, you can see a region that is stable, where currencies are moving up. If there was a weakness there, that currencies would be the first place you would see that. So then it becomes about trying to find those companies that are well enough managed, organised, positioned to translate the positive themes that we see in the region into profitable growth and cash streams that form the basis of any equity investment.

JY: So where are the the best opportunities in the region today? I think China makes up a significant portion of your portfolio. What are your thoughts on other places like India and the Philippines and the rest of the ASEAN nations and so forth? Where are you seeing the best opportunities?

EH: Well, the opportunities for investors need to be considered in two parts. Firstly, where are the best companies in terms of their operating performance and how profitable are they? How long have they been profitable for? Have they got a long track record of success, which is likely to continue? And do you see that coming through in revenue growth, in profit growth, in dividend growth?  So, you know, have you got companies within this region that have track records of success against which you can ascribe a market value?

Because that then leads you to the second question or the second part of the opportunity of where is the value to be had? Where are these good companies to be found that are trading at levels below the value they ought to be? And at the moment, we see a lot of opportunities in China in Taiwan. We see some in Australia, others in Singapore and in Malaysia, somewhere like India at the moment has a very good macro story, 7% or so, GDP growth in the most recent quarter, running at about 6% to be expected over the coming 12 months. And it’s underpinned by good consumer indicators. You know, car sales are strong goods and sales tax collections indicate high levels of consumer activity.

So the picture in India, from a macro perspective looks very good. And there are well managed companies there, but the Indian market is trading at over 20 times PE, the valuation therefore is not looking attractive. And so the Indian market did very well over the past couple of years or so, but this year has found it harder to make headway. So you have to stay focused as investors on these two questions: Where is the profitability to be found? And does the current market price reflect the like of the systems of that profitability?

JY: And I think we should talk a little bit about your own performance because I think it’s been pretty strong recently. So what has really been driving that? What have you got right?

EH: I think it is the fact that money is flowing back in the region and that it is the best quality companies that are attracting that investment. If you are looking at the sort of the big benchmark names in Asia, you are tending to look at those that dominate the benchmarks. So in essence, you are looking for the market to do the heavy lifting. So valuation expansion. So if you think about, what drives performance in a fund, it is the components of the total shareholder return, profit growth, dividend growth, valuation growth. And for Asia at the moment, I think the interest is very much in those companies where profits and dividends underpin performance, you are not yet likely to see significant valuation expansion. It goes back to your question of Asia is a bit of a worry, can it pick up the mantle from the US?

I think the conditions that we see prevailing at the moment are ones where valuation expansion is going to be hard to come by anywhere. But if you can find good companies that are trading below where they ought to be, then they will attract attract investors.

And so things that have done well in the portfolio in in China we have communication services. Some a video gaming company like Netties or a pharmaceutical company like China Medical System you know, has performed exceptionally well. Ianmade Enterprise is a company in Taiwan. It makes shutters doors, windows so nothing particularly exciting. They are selling into Asia and they’re also selling into the US. They have production facilities in Mexico. They have been seeing strong revenue growth, strong sales growth based upon their ability to develop bespoke products, which gives them pricing powers and, and margin expansion.

It’s been that has driven performance rather than we really want a shutters and doors company. It’s one where the sales have translated into profits translate into dividend growth. And that looks a very, a very interesting package. So when we are sort of where the performance is coming from is companies that on the face of it, aren’t necessarily the most exciting or at the initial at initial blush they are, they’re making products themselves that folk want to buy and that they are doing so efficiently and generating those revenue streams that underpin stock market investment.

So I think if I was to sort of put it into a nutshell, stories are not having the traction that they once did. It’s the evidence of profitability and cash flows that’s really driving this one. Stories really belong to sort of more bull market conditions. And we are in a period of uncertainty, you know, tell me a story by all means, but let’s, you know, show me the money.

JY: Yes, no, very good. But I mean there is some excitement though around Chinese tech and things. I mean the companies, I guess like BYD we’ve heard a lot more about over in the UK, I think CATL, the bash maker and things. I mean, you, you are still able to get a fair bit of tech exposure though in your fund, aren’t you? I mean, has that done well even with the income requirement?

EH: Yes, because you are looking at sort of tech businesses that are manufacturers and they are able to diversify the types of products they manufacture. So you’ve got say, Samsung Electronics, which is a highly cyclical technology business. It focuses primarily in the tech side on memory chips. And that is and that undergoes significant swings in pricing and demand cycles. But you are also able to find tech businesses that are involved in semiconductors, semiconductor design electronic components. They feed into the smartphone area, which is cyclical, but they also can feed into capital investment like data centres and the computing requirements associated with cloud computing, big data. And now AI, that’s a much more stable picture. So you can find electronics manufacturers that in fact have a very stable history in profitability. And by altering the product mix and the types of customers they supply to, you get less swings.

And because you can find those that dominate in their particular area, say you’ve got a specialist manufacturer, manufacturer of material like Elite Material provides the laminate for printed circuit boards. Circuit boards, and the integrity of the circuit board is crucially important because if it doesn’t work, then whatever it’s gone into doesn’t work. And in this case, the circuit boards are going into data centres requiring considerable computing power, which is associated with high levels of heat. The circuit boards have gotta hold up. So Elite Material provides these laminates and there aren’t so many of them, oh, other companies that can do that. So as demand goes up, Elite Material is very well positioned for that.

But to your earlier point about Chinese tech and exciting things going on, there is a lot going on in Asia. It’s, there is an emerging bull case, I think, for what will drive China and by extension the rest of the region into the next leg of growth. And that centres on these newer industries like 5G telecommunications, EVs, batteries, renewable energy equipment, industrial automation big data, cloud computing and specialist materials. All of these areas are ones in which China has been focusing on for the last 15, 20 years now. And it is backed not only by skilled labor and capital, but also by innovation, by proprietary knowledge.

Ee did some very interesting work on the degree to which Chinese academics are being cited in leading academic journals in these core areas. And you can see a direct link therefore between the citations in academic journals focusing, say on electric batteries and the dominance of Chinese citations versus that at the US. And you can track that right through as to why they are dominant in the industry themselves. And this plays out is sort of across specialist materials across automation even into the area of of AI.  They dominate or example in citations related to machine learning and how you train your AI engines.

And then we have at the beginning of January, Deep Seek emerges. [JY: Yes.] And the thing that they offered was cheaper and speedier machine learning. They built up the know-how and why did they do that? Because China was denied access to the fastest chips, the most high performance chips, they only have access to lower performance chips. So what do you do? You’ve got to find a way to lighten the load in terms of machine learning. And that’s what Deep Seek offered an ability to lighten the load to do it faster and more cheaply. Therefore, and that’s why you find Microsoft and Meta then commenting, saying, we will take these processes and fold them into our systems and suddenly we’re in a world where China’s not copying anymore, but they’re designing their own stuff. They’re leading. [JY: Yes.]

And that’s caused quite a shift in some people’s mental framework. The China’s advanced a lot further than they thought they had, that there is more innovation going on there. And it is the sort of the irony that the efforts to constrain China are the very things that are driving new innovation in order to solve for that. And that was a story that that was followed by Japan years ago by Korea and by Taiwan. China’s been doing it too. And it was really the arrival of Deep Seek that caused people to sit up. You could see it in 5G telecoms, you could see it in renewable energy equipment and how they dominate, and you can see it in electric vehicles, but I don’t think folk were expecting that Chinese also to be at the forefront in the biggest technological revolution of our time, which is in AI.

JY: Yeah, no, really interesting. And just finally then what is your sort of outlook for Asian markets? So over the next 12 to 18 months, or is that the wrong way to look at it? Should this just be a permanent allocation to people’s portfolio for the long term?

EH: Oh, well, as an Asian fund manager, I would say it should be a permanent allocation, but I think we are at a point where Asian markets have been on the sidelines for a while in terms of global allocation that that is now changing, the US is expensive, Asia is cheap. There are good companies there. There is a sort of a region that is now based on manufacturing but also on consumption. It’s diversifying, its manufacturing in terms of production in supply chains and in new markets consumers are getting wealthier. There is a trajectory there and there is a story that will underpin growth in terms of consumption and household incomes. If you can marry those two together, which we think we can, good companies serving this rising region, then I think Asia is looking very attractive over the next 12, 18 months, and probably beyond.

But right now Asia trades on about 13 and a half times. That is around an 8% earnings yield. And I talk about it in terms of earnings yield because you compare it to bond yields, they’re trading well above their equivalent bond yields. There’s value there. You are being compensated for the risk and more. So I think, you know, it is a good region to be looking at.

Where our funds sort of comes into focus is because of the dividends our companies are producing those excess cash streams, these companies are generating more cash than they need to fund their growth. It’s coming to us in the form of a dividend. So you’ve got evidence that these companies are really doing something that is good, that you can attach a value to long track records in, in having done so.

And if you are an income investor those dividends are quite useful because the current valuations of 4% yield is not hard to achieve. At the portfolio level, our fund has averaged a 4% yield over its life, over 10, 11 years. The yield has ranged from about 3.5-4.5%. So you’ve got a group of companies that are paying out about half their earnings, certainly no more than that. So they’re reinvesting the other half. So growing profits, growing dividend streams, no valuations, a story that is supportive for longer term growth.

JY: Well, it certainly seems to be working. So I mean, congratulations on the short and the long term performance is very good. And thank you very much for joining us today and that’s been absolutely fascinating.

EH: Thanks James. Very nice to talk to you.

SW: Guinness Asian Equity Income fund invests in companies across the whole Asia Pacific region, including Australia. This fund has two standout characteristics – the well defined and disciplined process, and the equally-weighted stocks. We like the managers’ approach of focusing on companies that can sustainably grow their dividend into the future and the fact that the portfolio looks very different from the benchmark and their peers.