HUB EXCLUSIVES PANEL DISCUSSION 2022 - A PERSPECTIVE ON ASIA
Panel discussion, hosted by Cherry Reynard, with:
Jason Pidcock – Investment Manager, Asian Equity Income, Jupiter Asset Management
Sunny Romo – Investment Director, M&G Investments
Growth is in short supply across the world as inflationary pressures weigh on spending. However, Asian economies are not experiencing the downturn in the same way: inflationary pressures are lower and the potential for long-term growth is stronger. Can they sidestep some of the economic problems that are bearing down on the rest of the world?
Jason Pidcock, manager of the Jupiter Asian Income fund, says that while the world’s economies are connected, inflation has been less of a problem across Asia, particularly in China. He adds: “These economies haven’t seen severe currency weakness against the Dollar. Typically, when the Dollar has been strong, Asian emerging markets have seen their currency weaken more, but that hasn’t happened this time. Asian economies also haven’t experienced the same supply squeezes, which has heightened the inflationary pressure elsewhere.”
For Japan, some inflation is welcome: Sunny Romo, equities investment director at M&G Investments says: “We’ve been in a deflationary environment for so long and finally we’re seeing pressure for companies to raise prices. Consumers are accepting those price rises and Prime Minister Kishida has talked about the need for higher wages. All of this is positive for Japan. There are higher costs as a result of rising energy prices, but we can absorb these pressures.”
There are worries. For Pidcock, these centre on China and, potentially, its weaker growth. He has sold out of all his direct China holdings, though still has some exposure indirectly through companies in Australia, South Korea and Singapore that sell into China.
He says: “There has been a slowdown in growth as a result of Covid lockdowns. There are also risks to growth from slowing exports as demand from other countries falls. We are still likely to see Covid lockdowns for a few months and geopolitical tensions are making investors in China more nervous, which means foreign direct investment won’t be the driving force it was in the past. India and Vietnam are benefiting from companies wanting to diversify their supply chains, just in case political tensions become even worse in the future.”
Long-term growth
However, Asia continues to offer better growth prospects than the indebted and fractured West. Tourism is returning in the wake of Covid and there is considerable innovation, creating technologies that may leapfrog those in more developed countries. Pidcock says: “At the moment, we favour India over China. In South East Asia, our preferred route is Singapore, where companies derive earnings from across the region. We also invest in Australia, which gives us access to the growth in the rest of the region. It’s a great growth story – a large population, very competitive with lots of skilled people and world-class companies.”
Romo says that investors need to revise their view of Japan’s prospects: “When you hear news about Japan, it’s tinted with a sense of doom. I’m excited about Japan as an asset class - so much has changed It hasn’t happened fast enough for the Western viewer - that’s why the stock market has disappointed - but I think we’ve definitely reached an inflection point where things have changed for good.”
She believes the social contract has changed for Japanese companies. In the past, they thought of themselves as employment providers. Now, there’s an understanding that Japan has to be profitable to regain its economic standing.” She points to initiatives such as the stewardship code, rising merger and acquisition activity, industry consolidation and better scrutiny by investment managers.
From here, the key issues facing Asian economies are not very different for those in the West: how much further do interest rates rise? How quickly does inflation roll over? Pidcock says that while Asia can weather these issues better, it will not be plain-sailing: “The strong Dollar has sucked liquidity out of many markets. We have quantitative tightening ramping up. It remains to be seen what impact that has on markets. It is unlikely to be positive so it is reasonable to be cautious.”
He believes that by early next year, the bulk of interest rate rises may have happened and markets may start to look forward again: “If they start to anticipate a recovery by the end of 2023, particularly if high energy prices come off a little bit, then markets can be more optimistic. We can look through a period of lower corporate profitability if we believe the businesses we own can come through that…there will be ups and downs, but we are investing in businesses with strong balance sheets and pricing power that should be resilient through economic downturns.”
Romo says: “There’s so many factors in play, it’s difficult to navigate. The input cost push is obviously a concern for many companies. From a Japan point of view, a lot of companies can wear that. Prices have been kept low for a long time in Japan because of the deflationary mindset. There’s a lot of room for Japanese companies to pass through that cost. It comes down to stock specifics. Companies with unique intellectual property and a good business model can weather this period of volatility. That presents opportunities for stock pickers.”
