A powerful upswing in corporate profitability in Asia ex. Japan was behind the performance of the region’s equity markets last year, according to Citywire AA-rated manager Toby Hudson.
This shift was supported by a number of factors, including stronger, more synchronised global growth, which helped support trade and export-related industries; a rebound in commodity prices; and continued strong growth in profitability for e-commerce and technology companies.
Hudson, who manages the Schroder Asian Growth fund and the Schroder ISF Asian Opportunities fund, said the funds benefited from their overweight positions in large-cap technology companies in South Korea and Taiwan, as well as e-commerce businesses in China. ‘All these companies delivered very strong earnings growth last year,’ he said.
The funds, which have returned 52.2% over the past three years, take fourth place in our risk-adjusted ranking for the sector’s strongest players.
Hudson, who is the head of Asia ex-Japan equity investments at Schroders, said the funds have also benefited from a broader exposure to a number of consumer discretionary names in China, in areas such as budget hotels, electrical appliances, autos, healthcare and education.
Strong domestic consumption and upgrader demand have helped these consumer discretionary names, he said.
Spending it wisely
Citywire AAA-rated Thomas Schaffner, who manages the Vontobel Fund mtx Sust Asian Leaders (Ex. Japan) fund, noted that as well as improving economic conditions, better capital expenditure discipline is driving the recovery of corporate profitability and cash flows. Schaffner takes third place in our risk-adjusted ranking of the sector’s leading performers, with his fund gaining 52.28% over the past three years, compared with average manager’s 27.91%.
‘We like companies that are leading in terms of return on invested capital, industry positioning, [and at the same time] trade at a discount to fair value and meet our minimum criteria in terms of ESG,’ he said.
Schaffner added that the earnings-revisions ratio has improved to its highest level in five years and margins are moving up. Growth rates in Asia remain higher than in the rest of the world, he noted, with stronger growth in the US also boosting emerging markets.
Structural, cyclical factors
Another of the sector’s leading lights, Citywire AAA-rated Avo Ora, said both structural and cyclical stocks currently present opportunities in the market.
‘We are seeing a lot of opportunities both for structural growth stocks, such as fintech, as well as in the more cyclical part of the market, for instance, heavy industry,’ said Ora, who is the head of Asian equities ex. Japan at Pictet Asset Management. His fund has been increasing its exposure to financial companies that are taking the lead in fintech.
In the cyclical space, meanwhile, China’s focus on quality growth versus quantity growth has triggered positive changes in the demand/supply equilibrium in favour of the larger incumbents. In effect, supply is being restricted, meaning that profitability is on the rebound.
‘We think this is particularly interesting as the cyclical heavy industry space isn’t typically viewed as a fertile source of opportunity,’ he said.
Ora manages Pictet-Asian Equities Ex. Japan fund, which has gained 45.27% over the past three years and takes ninth place in our risk-adjusted ranking. While Pictet likes the structural growth prospects of its technology holdings, it still took the chance to unwind some exposure at the start of fourth quarter of last year.
‘As valuation is very important to us, and we felt that valuations had become stretched, we chose to reduce some of our exposure here,’ he said.
Nevertheless, valuations for Asia ex. Japan equities generally remain compelling, especially compared with developed markets, Ora said. ‘We continue to find companies with strong cash flow generation and earnings growth higher than the markets at compelling valuations.’
The article was published in the May issue of the Citywire Private Wealth magazine.