We believe it is right to have a balanced strategy at the current time. We continue to have significant exposure to tech and internet stocks but have been trimming our holdings post the strong gains seen in share prices during 2020. We haven been reinvesting in selected cyclical stocks, and more recently, in the consumer staples and alternative energy sectors.
Some of the largest positions in the Asian equity strategy are in technology and internet companies. These companies are big beneficiaries of a confluence of demand factors, such as increased 5G proliferation, e-commerce and working from home trends. However, their improved earnings prospects are being increasingly recognised by the market and in keeping with our investment process, we have been taking profits from outperformers, as share prices move close to our estimate of fair value. For example, we have been cutting back positions in the likes of MediaTek, JD.com and Baidu, where a lot of expected growth already appears to be in the price after a period of strong performance.
We continue to invest in attractive opportunities among innovative tech and internet companies that arguably justify their re-rating, and those that are at an earlier stage in their earnings recovery, such as Largan Precision, the world-leading maker of lenses for smartphones. We had an opportunity to buy the shares at an attractive price after the US issued sanctions against Huawei, one of its major customers. We believe Largan can maintain its market leading position and expect that it will successfully transition to other customers over time, with flagship phones continuing to adopt higher spec cameras.
We have also recently introduced Autohome, China’s largest online platform for automobile buyers and sellers, and generally regarded as the best source of information on products, performance, consumer trends and customer preferences. The company is looking to shift monetisation away from advertising and dealer lead generation, toward data services, which increases the business quality in our view. We are also comforted by the company’s net cash balance sheet and free cash flow that has tended to exceed earnings.
We have been positioned for reflation, with selected cyclical businesses well represented in the Asian strategy. In our view, the discounts currently available in these areas are attractive given the potential for earnings to recover quicker than the market expects.
Multiple themes are evident in this section of the strategy. For example, reopening plays like the integrated resorts operator Genting Singapore, is a good example of a company which has been hit hard by the lack of travel but will be a key beneficiary of conditions normalising. Furthermore, its strong balance sheet (cash $4bn net cash position, which is >30% of its market cap) gave us confidence that they could ride through a tough 2020 and emerge stronger having taken the opportunity to renovate their resorts. Similarly, towards the end of 2020, we added ComfortDelGro, a Singaporean transport company, which we expect will see profits recover on the back of rising passenger numbers as Singapore emerges from lockdown. The market tends to have a myopic view when times are tough, we see this as an opportunity to invest in good free cash flow generating companies at a discount.
As economic conditions normalise, other companies have scope to see their earnings recover quicker than the market expects. This is the case for Covid-sensitive industrials and certain parts of the Asian auto sector such as Astra International, an Indonesian conglomerate with interests in market leading auto-related businesses. While the Indonesian economy is weak in the short term, we believe auto demand should eventually grow as GDP per capita rises. We have also built exposure in Mahindra & Mahindra, another conglomerate with a market leading tractor business in India that has good long-term growth prospects thanks to structural drivers in the domestic agriculture sector. Some auto holdings benefitted from the market’s enthusiasm for ESG positive stories which propelled the share prices of companies with electric vehicle (EV) exposure. This was an opportunity to take some profits.
Recently, we have turned our attention to the real estate sector, the worst performing area of the market in 2020, with structural changes under way. In China, the authorities have been tightening financing rules for developers, in an attempt to dampen house price growth and discourage speculation. The measures impacted all developers negatively, but we saw an opportunity to introduce China Overseas Land & Investment, which has a relatively strong balance sheet and the lowest cost of funding among its peers, ensuring that it has the ability to boost future growth by acquiring land banks/projects from overleveraged developers should opportunities arise.
At the same time, we have added to Hong Kong listed real estate company CK Asset, which has assets in commercial property and Hong Kong hotels as well as Greene King Brewery (UK) and an aircraft leasing business, all of which have been challenged by Covid. However, the company has a very healthy balance sheet, only marginal gearing and a lot of financial flexibility, which should support business growth either organically, or through M&A.
Turning to the financial sector, while we have an underweight position we continue to have notable exposure to banks and insurers with decent levels of core profitability and structural growth potential. For example, we favour Indian private banks such as ICICI Bank, that are well-capitalised and positioned to continue to take market share from undercapitalized and less well-run state banks. Furthermore, many banks appear to have over-provided as asset quality problems turned out to be much less damaging than initially anticipated. We also have exposure to Chinese life insurers such as, China Pacific Insurance, as we believe the market is underappreciating its attractive new business growth, strong capital position and best-in-class payout ratio.
Historically, the strategy has not had much exposure in more defensive areas of the market, at least relative to the index. Recently, we have introduced two new holdings in the consumer staples sector. Firstly, Tingyi, China’s largest instant noodle and soft drinks company has improved operational efficiency and launched more premium products, thereby boosting free cash flow. This has led us to believe that the market is underappreciating its improved fundamentals.
We also added Uni-President Enterprises, a food conglomerate in Taiwan with a very defensive group of businesses. This stock suffered due to concerns over how Covid lockdowns have impacted its 7-Eleven operations and is trading at a low multiple relative to history, which in our view does not reflect the strength of the business.
Finally, we continue to look for new ideas in China A-shares and have recently found a compelling prospect in an alternative energy company. Ming Yang Smart Energy is a manufacturer of generators for wind turbines, which should be well-positioned to take advantage of long-term wind installation targets in China. We believe the company can achieve and maintain high margins, even during periods of negative volume growth, due to a notable level of vertical integration within its business model.
We cannot escape the fact that the market is beginning to look expensive at the headline level. Fortunately, we do not have to buy the index. As active investors, with a contrarian approach we are well positioned to take advantage of the valuation disparity across sectors.
Asian and EM equities have struggled for much of 2021, with exports growth slowing after a strong recovery and China-related concerns denting investor sentiment. Yet, conditions have started to normalise, and looking forward we find reasons to be optimistic.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
As a large portion of the strategy is invested in less developed countries, you should be prepared to accept significantly large fluctuations in value.
All data is as at 31.03.21 and sourced from Invesco unless otherwise stated.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
