This is a good time to be an active investor in Asia
Asian markets have rebounded as the economy picks up. There is more good news to come, says Andrew Gillan, Head of Asia ex-Japan Equities at Janus Henderson Investors.
Improving macroeconomic conditions are always good for company performance and share prices. That has certainly been the case across Asia as the global economy has improved. The increasingly positive outlook for China’s economy will provide an additional boost to companies across the region.
‘We have been very positive on Asia since the start of the year. From a macro view, Asian growth will be higher than the rest of the world,’ says Gillan.
Asian Pacific earnings per share rose around 25% last year, according to Bloomberg numbers. Gillan expects further EPS growth of 10% or more in 2018.
Markets performed strongly at the beginning of this year, with Chinese technology taking a lead. Some investors remain sceptical on China, thinks Gillan, as volatility is a constant concern. But he is encouraged by stimulus measures in 2016 that yielded positive results. Banks are tackling non-performing loans and supply side reforms.
‘This year we're seeing some of the value sectors, the beneficiaries of supply side reform and then the banks, starting to do well,’ he says.
But he warns that further reform may end up being risky. If the government steps up efforts to deleverage the economy, there may be a hit on market sentiment.
Reforms in India have also been under the spotlight. The economy is more internally led, but there were significant implications for quoted companies from the demonetisation of 2016 and the introduction of the general sales tax. Corporate earnings fell short of expectations as a result.
Elsewhere, North Asia has posted strong export recovery figures. Korean cyclicals had a strong 2017. A pick up in global demand allied with limited supply growth has been good for Korean firms that produce memory chips for computers, smartphones and a growing list of connected devices.
‘Companies have played well to the global recovery led by the US and the European Union. The recovery in demand from China has come a little later,’ Gillan says.
Bloomberg numbers show Asia ex-Japan equities posted strong performance last year, up almost 40% in 2017 in US dollar terms. Gillan believes they still have room to grow. A large portion of those returns was supported by earnings growth and Asian currency strength also contributed. The market has structurally underperformed global and developed markets for the last four or five years.
‘The Asian equity re-rating is far from over,’ he says.
Global institutional inflows help bolster the case. Flows into Asia accelerated towards the end of 2017. Recent global volatility did little to undermine the positive sentiment. Gillan detected none of the historical outflows that can affect Asian markets when global equities are stressed.
An influx of active money is also good news, thinks Gillan, as investors need to be selective. Many tech stocks are now close to being fully valued, accentuating the need for selective stock picking.
Gillan has lowered tech exposure as a result. The Asian growth and China teams, instead, have actively increased their exposure to Asian financials as the economy has improved.
‘The market assumption was that banks would benefit from rising US interest rates, but there has been a lag. Singapore bank shares have moved ahead of their earnings improvement but we still see improving return on equity and better margins to continue,’ says Gillan.
The consumer sector picture is also more nuanced, with a significant disparity in valuations across the region. It is not uncommon to see large Indian consumer stocks on 40x earnings, but Chinese consumer names have underperformed in recent years, opening up pockets of value opportunities.
There are plenty of other selective stories to follow. Taiwanese food staples are seeing increased demand from China for noodles and beverages. Macau gaming stocks play a useful role in Janus Henderson’s China portfolios. But they can be hard to read for its broader Asia growth strategies that track structural change.
Japanese stocks are also doing well. Exports have risen and corporate governance reforms are paying off. Janus Henderson’s local large and small cap portfolios spot a compelling earnings growth story, with the added benefit of rising dividends as corporate boards align themselves more closely to small shareholders.
In fact, Gillan points out that Japan was not alone in breaking dividend payout records last year. Hong Kong, Taiwanese and South Korean firms also increased dividends, taking the regional total to US$140bn.
Australia remains an underweight. Banking stocks dominate the market and are under pressure from the wide-ranging Royal Commission, which may put downward pressure on returns.
‘We think Australian banks will struggle to maintain their high returns. It was an easy decision to underweight,’ admits Gillan.
Commodity stocks also play an outsize role in the Australian market. New management teams find themselves having to deal with bad acquisitions of the past. Top executives at global miners such as Rio Tinto are now intensely focused on boosting cash returns to investors–good news for Janus Henderson’s Asia equity income team.
In South East Asia, the team also sees more opportunities. ASEAN markets have been marginalised a bit by ETF money targeting the larger index countries so we do see some value there.
‘We have added to Malaysia in our income and growth strategies. Oil prices have recovered and forthcoming elections should be good for the domestic market,’ he says.
The Philippines remain a firm favourite as well. From a top down perspective, the economy may appear to be overheating. Even so, the belief is that the well-run large conglomerates are diverse enough to ride out any hiccups.
‘Large index stocks were disproportionate outperformers last year,’ says Gillan.
He also says that as many Asian firms are family-run, active managers have the advantage of being able to monitor corporate governance levels to ensure they as shareholders get the best returns. Overall, ‘it is a good time to be an active investor in Asia,’ Gillan concludes.
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