Each week, a professional investor tells us where he’d put his money. This week: Andrew Graham of Martin Currie’s Asia Unconstrained Trust finds three regional stars.
Global investors have a long list of things to worry about: global trade tensions, emerging-market turmoil, the rising oil price and, perhaps most importantly, a major shift away from the exceptionally accommodative monetary conditions seen since the global financial crisis. As bottom-up investors with a disciplined approach, we are averse to making political and economic forecasts. To us, the key issue is whether these dynamics are likely to upset strong corporate fundamentals in Asia. We remain sanguine.
Compelling regional fundamentals
Conditions remain upbeat in most Asian economies. Intra-regional trade is becoming increasingly important (softening the impact of Washington’s barrage of tariffs), employment levels are high and incomes are on an upward trajectory – all of which is supportive of consumption. Meanwhile, many firms are in rude health, both from an earnings and a balance-sheet perspective.
Asian non-financial corporations are awash with cash: they have a total of US$1.8trn of cash and equivalents. As for earnings, we’ve just seen the strongest recovery in seven years, and we expect double-digit growth (north of the long-term trend). Despite this positive backdrop, however, Asia ex-Japan equities continue to trade at a sizeable discount to their US and European counterparts.
The market is always prone to overreaction, which creates opportunities for those able to keep a cool head. The following are three companies we believe are strongly positioned to capture secular growth trends across insurance, consumer goods and banking.
AIA (Hong Kong: 1299) is a Hong Kong-listed life insurer with a mix of profitable businesses that can generate capital to fund growth throughout Asia. In our view, AIA’s distribution capabilities, brand and strong balance sheet make it well placed to take advantage of Asia’s underpenetrated life-insurance market. Our expectations for the company are based on continued growth of premiums, written at attractive margins, and the maintenance of a prudent capital buffer to support that growth.
Harnessing Asia’s spending power
Korean consumer-goods business LG Household & Health Care (Seoul: 051900) has been harnessing households’ growing spending power very successfully, particularly in its high-margin cosmetics segment – with China’s swelling middle class presenting a very large opportunity. Indeed, premium cosmetics sales in China are expected to continue to grow at a rapid clip, while de-escalating Sino-Korean tensions should boost domestic duty-free cosmetics sales as growth in inbound tourism from
China resumes.
HDFC Bank (Mumbai: HDFCB) is India’s leading private-sector bank. It has been gaining market share in new loans owing to the struggles of India’s poorly capitalised public-sector banks. HDFC has a strong retail deposit base, giving it low funding costs compared with peers, and its relatively low non-performing loan balance underlines
the quality of its lending. Operating efficiency has also been improving and we expect this to continue as the bank continues to enjoy the benefits of its expanding scale while leveraging its digital banking infrastructure in what is still a very under-banked market.