Each week, a professional investor tells us where he’d put his money. This week: Ian Hargreaves of Invesco Asia Trust selects three undervalued stocks in his region.
With the seesawing of trade negotiations over the past year, Asia has been hitting headlines for the wrong reasons. However, beyond the trade spats, the region remains the biggest driver of global growth with impressive economic and corporate fundamentals. Look closely and you will also see there is a solid trend of greater capital discipline being displayed by companies across the region, with stronger balance sheets and improving cash positions. These changes are often underappreciated by investors.
We look for opportunities in unloved areas of the market. We are overweight in financials, given what we consider to be improved fundamentals at selected banks and insurers, and look to take advantage of valuation weakness where we can find it. We also have a focus on companies with strong competitive advantages and undervalued earnings-growth prospects. A number of our holdings in the IT sector match this description and we have some significant positions in dominant Taiwanese and South Korean companies.
China Pacific Insurance: an undervalued Chinese insurer
One example of our investment strategy is China Pacific Insurance (Hong Kong: 2601), the third-largest life and non-life insurer in China, with 6%-7% and 10% market share respectively. The industry still has quite a large gap in terms of protection coverage and, in our view, demand has crossed a threshold of consumer acceptance for more sophisticated products. China Pacific Insurance is offering these higher-margin products and is gradually expanding profit margins. However, the insurer had fallen from favour given macroeconomic uncertainty and regulatory tightening. This led to its share price derating to well below what we considered to be fair value. We believe the market is underappreciating its attractive new-business growth and strong capital position.
ICICI Bank: opportunities in Indian private banks
While valuations in India are relatively high, we are still able to find attractive bottom-up opportunities. This market has the best reform momentum in the region and is at the trough of its credit cycle, which suggests there are fewer constraints to structural growth as compared with other economies. Some of our biggest positions in India are in private banks. Compared with state-owned banks, which control about 70% of all banking assets, private banks such as ICICI Bank (NYSE: IBN) are well capitalised and offer good digital and end-customer service. This allows them to be more competitive, gain market share and enter a virtuous cycle, which allows for higher-grade lending and lower risk. These are good ingredients for improved return on equity and a rerating for the shares.
Delta Electronics: out-of-favour Taiwanese tech
We have maintained significant exposure to cash-backed Taiwanese technology companies such as Delta Electronics (Taipei: 2308). The company had fallen from favour due to some weaker-than-expected results and near-term concerns over pricing and costs pressures, which had dampened the outlook for its operating margin. However, Delta’s components business has a number of long-term growth drivers, with products aimed at electric vehicles, industrial automation and cloud computing. We believe this will support attractive revenue expansion and profit-margin improvement.