HUB EXCLUSIVES PANEL DISCUSSION 2023 – THE ASIAN CORPORATE SECTOR
Panel discussion, hosted by Cherry Reynard, with:
Will Scholes, Manager of the Premier Miton Emerging Markets Sustainable Fund, Premier Miton Investors
Sam Konrad, Investment Manager in the Jupiter Asian Equity Income team, Jupiter Asset Management
Tim Erskine-Murray, Investment Specialist Director, Baillie Gifford
Asian stock market returns have been unexciting in recent years, held back by the region’s slow recovery from Covid, the relative weakness of China and also, the tough comparison set by the US technology sector. However, many of these headwinds have dissipated over the last 12 months and the outlook for the corporate sector – and the price investors have to pay for growth – is more appealing than it has looked for some time.
Asian stock markets have lagged broader global indices over the past 12 months. The MSCI Asia ex Japan index has risen 11.3% over the year to 29 September, compared to 21.4% for the MSCI All Companies World index (ACWI). This caps a difficult run of form for Asian markets, with the five year annualised return just 0.9%, compared to 7% for the MSCI ACWI.
Much of this weakness is attributable to China, and in particular, its dominant technology companies such as Tencent and Alibaba. These have been poor performers since the government clipped their wings in 2020. Recent data from Refinitiv shows China’s major technology companies have shed more than $1 trillion since the crackdown.
Asian companies have also been subject to many of the same phenomenon as other markets over the period. In the technology sector, for example, traditional technology has been sluggish, particularly the semiconductor sector, but anything artificial intelligence-related has done well.
Share price performance has not necessarily reflected earnings. Tim Erskine Murray, investment director Asian equities at Baillie Gifford, says: “Many of the corporate results in China have been pretty decent, with the large platforms, such as Alibaba and Baidu seeing a decent recovery coming through. Profitability has improved and large parts of the Chinese economy are not doing as badly as the Western press might suggest..”
Here, earnings per share growth is expected to outstrip the rest of the world by several percentage points in 2024 and 2025, says Will Scholes, manager of the Premier Miton Emerging Markets Sustainable fund, particularly among Asia’s emerging economies. He adds: “Emerging market corporate earnings have tended to grow faster than developed market earnings when the world is starting to go into a monetary easing cycle. The set-up is pretty positive. As we see it, the reason why emerging markets haven’t outperformed developed markets is that the Federal Reserve is still signalling ‘higher for longer’. That’s keeping buyers of risk assets slightly wary.”
In general, investors are paying less for that growth. The MSCI Asia ex Japan index is trading on a forward price to earnings ratio of 12.3x, compared to 15.5x for the MSCI ACWI. The price to book ratio is also significantly lower – 1.5x versus 2.7x. Will says that this is as large a discount as has been seen for 20 years.
Asian markets are also a fertile hunting ground for dividends. Sam Konrad, investment manager in the Jupiter Asian Equity Income team, points out that since 2001, reinvested dividends have made up 61% of the total returns in Asia and that there is a higher proportion of companies in Asia with a dividend yield of more than 5% than any other region in the world.
He says: “We find it easiest to find those quality income companies that pay an attractive and growing dividend in Australia, Singapore, Taiwan, Indonesia. The strength of Asia is that there is a real blend of developed and emerging market exposure. In Australia and Singapore, we find well-managed companies with good governance, that care about their shareholders and want to return profits to them.”
Sam says the benign economic background is creating an environment where companies can grow their earnings and dividends. The latest Janus Henderson Global Dividend index showed Asia ex Japan equities growing at a solid 4.5% in the second quarter of 2023 . This reflected healthy underlying growth, rather than one-off special dividends.
Asia appears to offer higher growth at lower cost than many of its peers. The Asian corporate sector is generally in good health, with lower debt and plenty of exciting growth opportunities in areas of structural growth. The next decade promises to be better than the last.