HUB EXCLUSIVES PANEL DISCUSSION 2022 - RESPONDING TO VOLATILITY IN ASIAN MARKETS
Panel discussion, hosted by Cherry Reynard, with:
Jason Pidcock – Investment Manager, Asian Equity Income, Jupiter Asset Management
Sunny Romo – Investment Director, M&G Investments
In spite of a stronger economic outlook, Asian equities have tracked the ups and downs of global financial markets for the year to date. For fund managers, there has been a question of whether to stay put, or respond to a changed economic environment. Jason Pidcock, manager of the Jupiter Asian Income fund, and Sunny Romo, equities investment director at M&G Investments, describe how they are responding to market volatility and positioning their portfolios for the uncertainty ahead.
Despite volatility in stock markets, neither manager is frantically adjusting their portfolio. Pidcock, for example, has seen relatively little activity in the portfolio, having sold out of his last Chinese holdings early this year as part of a country allocation call. Nor does he foresee any major activity from here: “The portfolio is well-balanced. We have some big country bets versus the benchmark. We are very overweight Singapore and Australia, and have a zero weighting to China. Australia is one of the most underappreciated markets globally – for me, it’s like a small version of the US without the same political tension or government debt, plus some world class businesses.”
Romo has also made relative few changes in the portfolio: “We are always on the look-out for new ideas and we always try to ensure competition for capital within the portfolio. There has been a few opportunities to add more capital to our existing holdings and that has been our main focus.”
Key themes
Pidcock has been looking again at some unloved sectors: “The world changed in February when Russia invaded Ukraine and we’re likely to be in a different world for some time. Defence spending has been ratcheted much lower for many years, now going to rise. Defence companies have the highest barriers to entry of any sector in the world. It takes a long time to get a licence and then to get orders, so it’s the incumbents who benefit most from increased spending.
He points to other sectors that were shunned, which now look more attractive, including energy and tobacco. “People are reassessing their view, realising people need these products. Margins are good and they can pay a decent slug of earnings in the form of dividends. I suspect sector allocation may prove just as important as country allocation going forward.”
For Romo, the theme of “value-added share ownership” runs through the group’s holdings in Japan: “We want to be active investors. That means having a dialogue with investee companies and being own catalyst for change in companies. We want to be the shareholder of choice. That doesn’t mean we’re a pushover. We want to challenge management, and bring something to the table in company meetings.” She also sees an increasing receptiveness among Japanese companies to have these conversations.
The prospects for earnings
Earnings have been reasonably robust over the past few months, in spite of the difficulties facing the global economy. Jason believes there may be more pain to come, but it will depend on the sector, “Commodity prices will have a big impact. If they stay high, mining companies can continue to be very profitable, while more discretionary and tech sectors would continue to struggle.”
However, he believes it will be important to look through shorter-term earnings problems: “One year of earnings decline doesn’t matter if the three to five year view is still good – particularly if the company has still got a good balance sheet.”
“The indebtedness of a company will make a difference as interest rates go up. Companies with strong balance sheets relative to their business model. The greater the visibility of earnings, the more comfortable we are with debt. Where earnings are variable, we like a rock-solid balance sheet and net cash.”
Romo says the market is looking beyond short-term bumps. While there is a dislocation between operational and share price performance, this is more because Japan itself is overlooked. She adds: “There are just so many undiscovered companies in Japan at the moment. Not enough people cover the market. So far earnings have held up well. We’ll probably see downward revisions, later in the year, but I don’t expect it to be severe.”
Nevertheless, both managers expect there to be significant differences between the winners and losers in tough market conditions. Finding resilient businesses that can grow their earnings in spite of rising inflation, interest rates and weaker growth will be vital in generating returns in this environment.
