Each week, a professional investor tells us where he’d put his money. This week: Andrew Graham, Martin Currie Asia Unconstrained.
A cursory scan of the headlines may lead one to some downbeat conclusions about the outlook for Asia, what with sabre-rattling on the Korean peninsula, or worries about China’s debt mountain. Granted, these issues bring risks, but they should not eclipse all the good news.
Recent Chinese economic numbers – including GDP growth and producer-price inflation – have been surprisingly strong, supporting the view that a hard landing will not happen. The macroeconomic backdrop across the region is encouraging too, with employment levels high, incomes growing and consumption stable or improving.
This positive outlook is mirrored on the corporate front, with Asian companies delivering the strongest earnings recovery in seven years. This recovery is likely to continue, which should underpin an improvement in investor sentiment. Meanwhile, balance sheets across the region are cash-rich – non-financial companies sit on around US$1.8trn in cash and equivalents, a historical high.
Markets have recently received a boost from the weaker US dollar, which has served to push money into emerging-market debt and equities. Even so, I judge valuations to be reasonable, with Asian equities trading broadly in line with long-term trends on a price-to-book basis (slightly above in terms of price-to-earnings). They are still priced at a significant discount to European and US equities – a curious state of affairs given the strong corporate fundamentals and supportive macro environment.
We continue to find interesting new opportunities in the region, particularly those exposed to secular growth trends such as the rapid adoption of information technology and the expanding middle class. Tencent (Hong Kong: 700) enjoys a powerful market position as the leading internet platform in China, with a large, active user base and top-line growth comfortably above 20% per annum. The firm has broadened its range of revenue sources in an attempt to reduce the risks of future growth.
A good example of the consumption theme is Coway (South Korea: 021240), the market leader in the home-wellness appliances market in Korea. Its key products are water purifiers, air purifiers and bidets, but it also manufactures and distributes water softeners and mattresses. It has used a robust product-rental model for the past two decades, and high customer-retention rates underpin its consistently high cash flows and strong profitability.
Matahari Department Store (Indonesia: LPPF) is also aligned with consumption growth. Matahari is the leading player in the department-store sector in Indonesia, with a dominant position in the middle-income bracket. The company has the advantage of a nationwide network of stores, with scope for further expansion as it seeks to tap into the rising wealth of the Indonesian consumer.