HUB EXCLUSIVES PANEL DISCUSSION 2023 – THE ASIAN ECONOMIC LANDSCAPE
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
Asia is a large and diverse region. It covers both fast-growing emerging markets, such as Indonesia and India, but also well-established dividend-heavy developed markets such as Australia, Singapore or New Zealand. It incorporates secular growth themes such as AI and the energy transition, while also offering exposure to traditional areas such as commodities or banking. How are fund managers navigating this diverse opportunity set today?
Perhaps the first decision for all fund managers is their position on China. China’s economic recovery has been sluggish, and its economy faces a range of structural challenges. However, it is also a major technology innovator, the largest economy in the region and, after several years of lacklustre returns, share prices look very cheap. It is also around one-third of the MSCI Asia ex Japan benchmark, so fund managers need to have a view.
Many fund managers remain unconvinced. Sam Konrad, investment manager in the Jupiter Asian Equity Income team, says: “We don’t have any holdings in mainland China, despite it being 30% of our benchmark.” He believes the country’s structural problems will act as a brake on growth, but also finds relatively few robust income opportunities in the region. He adds: “We have around half our portfolio in India and Australia, which offers very different dynamics. From a geographic point of view. We’re also overweight Singapore and Taiwan.”
Will Scholes, manager of the Premier Miton Emerging Markets Sustainable Fund, has a 10% underweight in China, but still sees some opportunities there. For example, he likes the life insurance sector: “One of the solutions we see to the problem China faces around consumer demand is to provide more of a safety net. Consumers can consume more if they feel better protected and this is where the life insurance sector comes in.”
Tim Erskine Murray, client services director, Asian equities, Baillie Gifford, says: “Sentiment towards China appears as bad as it’s ever been and that appeals to the contrarian in us. Valuations look very reasonable.” He says that there are areas where China is excelling, including many of the sectors around the energy transition. This is where they are focusing their attention.
Sectors
Konrad is relatively defensively positioned, believing that there are still headwinds for the regional economy: “We are underweight consumer discretionary stocks. We think the economic outlook going into 2024 is likely to be tough and so we prefer to have a more defensive exposure. But we also have exposure to some of the cyclical sectors such as technology. We want to find sectors that are able to pay a growing dividend over time.”
The Premier Miton fund has an explicit dual return strategy, so it is trying to find the highest quality, profitable franchises that are also operating in areas with an unmet need. Scholes adds: “They will be trying to solve a problem on an environmental or social level and the way we look at that is to align ourselves with the UN’s SDGs. One of the particular areas we place an emphasis on is pricing power, innovation and reinvestment. We want companies to be reinvesting in high rates of return and for those to be aligned with secular growth themes such as energy transition or life insurance.”
Erskine-Murray says the Baillie Gifford portfolio is taking a barbell approach between secular and cyclical growth opportunities. He adds: “We have overweight positions in India and Indonesia, plus 7-8% in Vietnam. We are overweight in energy and materials and have exposure to secular growth themes such as energy transition and the materials required for that. We are also focused on the growth of the Asian consumer, moving supply chains and how that impacts countries going forward.”
Outlook
Looking ahead over the next 12 months, Konrad remains defensive: “There is a degree of uncertainty in the economic outlook. We don’t know what will transpire, but want to minimise risks.” Erkine-Murray is a little more optimistic, believing that Asian economies do not face many of the challenges currently experienced in Western markets.
He adds: “Most Asian economies have pursued orthodox monetary policies, unlike the West, so they’re in better shape. The one thing that has really struck me coming out of Covid, is how much broader and deeper the Asian universe has become. It used to be that you could buy a bank, a utility or perhaps an oil company, now we’re seeing a much richer universe of stocks. We find that encouraging.” Scholes says that emerging markets today are not the emerging markets of yesterday, particularly in Asia. Disciplined monetary policy has been part of that.
The Asian markets have something for everyone. They are as diverse as they have ever been: investors can get access to growth or income, to developed or emerging markets, and to a breadth of growth themes. Fund managers’ views are as diverse as the markets themselves.
