Mark Dampier: In it for the long term, with a balanced view on Asian equities
Saturday 19 July 2014
One region which always incites excitement with investors is Asia. The region is home to some of the most dynamic economies in the world and given the outstanding, albeit volatile, long-term performance of its stock markets, it's no wonder Asia continues to spark interest.
It's always refreshing to hear an honest and balanced view of Asian equities. I can usually rely on the First State team to provide a considered opinion, and a recent meeting with Richard Jones, co-manager of the First State Asia Pacific Leaders Fund, was certainly true to form.
Mr Jones informs me it has recently proved difficult to find value in the region, despite periods of market weakness over the past couple of years. Global economies are currently contending with vast amounts of debt, and this is likely to provide an overhang for some time to come. Asian and emerging markets are not immune.
However, Mr Jones and the team at First State are encouraged by the long-term prospects for Asia, supported by favourable demographics, an expanding middle class and improving corporate governance. They are far more cautious in their short-term outlook than many others.
While Mr Jones anticipates further setbacks, he is a patient investor focused on businesses more likely to withstand economic uncertainty. He seeks cash-generative companies which have built barriers against possible competition, sound balance sheets and pricing power. Historically, the fund has been tilted towards defensive areas of the market and higher-quality, larger companies.
One country he is excited by is India, where exposure has increased to one fifth of the portfolio – by far the highest weighting the fund has ever held. Historically the Indian economy and politics have been a mess, providing a far from conducive environment for Indian businesses which as a consequence have built strong "moats" – they are often well-managed, with an emphasis on minimising costs and maximising returns.
Indian companies are also relatively risk averse and often family owned, aligning their interests with those of shareholders. The First State team have always liked Indian companies but valuations have often been too expensive. General weakness and volatility seen in the Indian stock market over the past couple of years has provided a far more attractive entry point.
A real game changer could be the recent election of Prime Minister Narendra Modi with a clear majority; the result could prove a clear mandate for change, which brings the prospect of political and economic reform in India.
Elsewhere the fund holds 14 per cent in Australia, though this is lower than the benchmark weighting. The country has increasingly seen its fortunes linked to the Chinese commodity boom, which is coming to an end. Prices and wages are now very high, while productivity is poor. Its currency also looks vulnerable. In spite of this, Mr Jones is happy to maintain positions in a number of high-quality Australian companies, several of which are exporters who are less reliant on domestic demand and provide a natural hedge against currency declines.
The fund also has some flexibility to invest in companies listed in developed markets, though valuations across the developed world are generally now less attractive following the global stock market rally. Outside Australia, the fund currently holds just two developed market-listed stocks; Japanese firms Unicharm and Pigeon, manufacturers of personal care and baby products. Both companies generate a large proportion of sales from China and are benefiting from rising demand for high-quality, reputable brands.
In my opinion, Asia Pacific remains a great long-term story. In the short term, periods of volatility should not be ruled out and there might still be a better entry point. However, in my view this fund remains one of the best to build up a long-term holding. In what can be a volatile sector, a conservative, flexible approach seems sensible. This is exactly the type of approach adopted by First State, and I expect long-term investors will continue to be rewarded for their patience.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit www.hl.co.uk
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