HUB EXCLUSIVES PANEL DISCUSSION 2022 - ASIAN STOCKMARKETS
Panel discussion, hosted by Cherry Reynard, with:
Jason Pidcock – Investment Manager, Asian Equity Income, Jupiter Asset Management
Sunny Romo – Investment Director, M&G Investments
Asian stock markets have not escaped the volatility seen in financial markets since the start of the year. Many of the patterns have been the same: a preference for value over growth, a focus on higher quality companies with defensive characteristics, but with the added drama of China’s ups and downs added in for good measure. What is next for the region’s stock markets?
By the end of last year, a lot of unfashionable sectors, such as oil and gas, defence, tobacco or mining, had become very cheap. This year, prompted by high interest rates and Russia’s invasion of Ukraine, there has been a change in sentiment and these sectors came back into fashion.
Jason Pidcock, manager of the Jupiter Asian Income fund, says: “Energy was the poster-child for this shift, but tobacco stocks, defence and mining also did very well compared to highly valued stocks in the technology sector.” Another stand-out trend has been the weakness in Chinese equity markets relative to the rest of the region. The outperformance of value has also been seen in Japanese markets.
However, stock specific characteristics have also been important. Companies that have balance sheet strength, that have the ability to pass on cost increases and can side-step regulatory and political risk have also been popular with investors. Sunny Romo, equities investment director at M&G Investments, says: “Where companies have been doing the right things, such as restructuring, it has been noted by the market. Overall, it has been individual stock stories that have driven markets.”
Winners and losers
From here, both Pidcock and Romo believe there are real opportunities despite a difficult economic backdrop. Romo says: “We’re seeing such amazing opportunities. Even in a falling market it is possible to make money, and we’ve managed to do that. It’s about picking the stocks that have the prospects of an outsized return and avoiding macro or factor risks that you don’t want to take on.”
Pidcock agrees that it’s still possible to make money, while acknowledging that it is very difficult to predict markets in the short-term. “I don’t think we have to be hugely positive for the year ahead, the key is to be positive for the long-term. I still think equities are the best place to put your money if you can handle any short-term volatility. The important thing is to avoid sectors in real difficulty such as the residential property market in China.”
Asian markets have started to anticipate a weaker time ahead for the consumer, even though inflationary pressures have not been as severe as in the West. Consumer staples stocks have held up well because they have pricing power. Pidcock says; “Businesses can pass on their cost increases but that squeezes the wallet of the consumer, which means they have less money to spend on discretionary items. That’s where there have been problems.” He believes any slowdown or recession will be tough for consumer discretionary businesses.
He likes companies such as ITC in India, a consumer staples stocks with tobacco as its largest earner, but which has grown rapidly in food and beverage. It has a net cash position with good pricing power ‘They’re large, they’re liquid, with a good dividend. For us, they tick all the boxes.”
Romo is focusing on specific segments. She likes companies involved in IT services, for example, that are helping Japanese companies catch up on digitisation. She believes in-bound tourism and the cheaper exchange rate should help some domestic leisure companies. She adds: “There’s a lot of companies undiscovered compared to US peers, valued at extremely low multiples. While investors often worry about ‘Japanification’ – a developed country in decline and long deflation, they could ultimately start to look at Japan as an economy that actually provides solutions. Any companies that contribute to that have a long way to go.”
Dividends
The market is likely to be support by dividends. Pidcock says that this year has already seen good dividend increases in Singapore, India, Taiwan and Australia. However, payouts may be less certain over the next 12 months. “There is a lag between profits and dividend payments, so it’s a bit early to predict dividend prospects for 2023. There will be pressures. Mining companies, energy companies and financial companies have seen robust dividend payments.”
He believes technology company dividends could remain under pressure, along with payouts from more cyclical companies as well. However, he adds: “Dividend yields are pretty healthy. It is possible to put together a portfolio yielding above 4% quite easily. The long-term output for dividends remains good and is high compared to the 10 year government bond yield.”
Romo says: “In Japan, dividends have held up well, but more interesting have been buybacks, which have been used as a way to return excess capital to investors. By the end of August, buybacks were almost at the level of 2021, which was in itself a record. Add this to 2.5% dividend yield and it looks pretty healthy.”
As with all markets, it is difficult to predict the outlook for Asian markets over the next 12 months. However, in the longer-term, valuations are low, dividends are robust and growth prospects are stronger than elsewhere. It is a fertile hunting ground for the investor who can look through short-term noise.
