Each week, a professional investor tells us where he’d put his money. This week: Andrew Graham of the Martin Currie Asia Unconstrained Trust.
A degree of soul searching and reinvention has been necessary for companies in Asia, particularly those whose primary business is in global markets, as they adapt to a world where muted economic growth has become the new normal. However, Asian GDP growth still outstrips other parts of the world and fears of a Chinese hard landing now appear to have subsided.
You can always find macro risks, but it is not hard for us to identify companies that are growing. The best way to position for both the risk and potential recovery remains investing in high-quality business with exposure to the long-term growth of Asia. We still find firms that are well managed and exposed to strong secular trends within the region.
One of the themes that I find particularly interesting is the disruptive effect of technology. A prime example of this trend is Tencent (HK: 700), China’s leading online community. Its WeChat messaging service is ubiquitous across China, with around 800 million users. The WeChat platform provides the company with an exciting range of ways to make money from its users, including digital advertising, mobile games, subscription services, music streaming and payment services. This, combined with a number of improvements in its operations – including a reversal of declining margins, further diversification of its revenue generation and evidence of commitment to remaining a capital-light platform business – makes for a compelling story.
Most people access these technology services through their smartphones, so mobile demand plays a huge role in shaping the industry’s future. This can be seen in the growth of 4G in China, where the most dominant player by far is China Mobile (HK: 941). Data services have already overtaken voice calls and text messaging as its largest revenue contributor and data volumes continue to rise. Chinese mobile providers do not offer unlimited data deals – unlike firms in many other markets – and so they are able to benefit properly from the growth in data services. We expect strong data demand to drive up average revenue per user and to reinvigorate revenue growth. We are also optimistic that since the company has amassed a large cash pile, it could pay out a larger proportion of its earnings as dividends from 2017.
Asia’s potential is by no means restricted to technology plays. Companies are positioning themselves to take advantage of other strong dynamics – notably rising household income. Improved standards of living have resulted in an increased demand for insurance. AIA (HK: 1299), a pan-Asian life insurer, is well-placed in what is still an underdeveloped market for insurance. Despite currency headwinds, it has reported strong results in 2016. Fewer disappointments across Asian markets mean that the long-term trend of downward revisions to its earnings estimates could be moderating.