19 December 2019 | Ian Hargreaves, Co-head of Asian and Emerging Market Equities
With protests in Hong Kong and the continuing back-and-forth in trade negotiations between the US and China, Asia continues to grab the media headlines. But looking beyond the negative news, Asia still remains the most important driver of global growth with strong economic and corporate fundamentals.
We have found that there is an impressive trend of greater corporate discipline being displayed by companies across the region, with strong balance sheets and improving cash positions, which is often underappreciated by the market, and is what we look out for.
In terms of sectors, we favour financials given what we consider to be improved fundamentals at selected banks and insurers, looking to take advantage of valuation weakness where we can find it. We also have a focus on companies with strong competitive advantages and undervalued corporate earnings growth prospects. A number of our holdings in the IT sector match this description and we have some significant positions in dominant Taiwanese and South Korean companies.
Undervalued banks and insurers
One example of our investment strategy is China Pacific Insurance, the third-largest life and non-life insurer in China with 6% and 10% market share, respectively1. The industry still has quite a large gap in terms of insurance protection coverage, and, in our view, demand has crossed a threshold of consumer acceptance for more sophisticated products. China Pacific Insurance is offering these higher-margin products and gradually expanding profit margins. However, the insurer had fallen from favour given macroeconomic uncertainty and some regulatory tightening, resulting in its share price being de-rated – trading well below what we considered to be fair value. We believe the market is underappreciating its attractive new business growth and strong capital position.
Opportunities in India
Historically, it has been difficult to find what we would consider to be good quality companies with good management trading at attractive valuations in India. However, recent market weakness has meant we have been able to identify a number of stocks that fit this profile, and which are also largely insulated from external trade war-related pressures. These new ideas complement existing holdings that we have held in, for example, private sector banks. For example, Mahindra & Mahindra is an Indian auto manufacturer which has seen its share price de-rated ahead of an expected downturn in the tractor cycle. We believe concerns are overdone given significant cost restructuring, the diversified nature of its business model and a healthy balance sheet. We also introduced Shriram Transport Finance, the largest second-hand commercial vehicle financing company in the country and we believe there is potential for Shriram to gain market share.
We have maintained significant portfolio exposure to cash-backed Taiwanese technology companies such as Mediatek. The semiconductor design company has been one of the biggest contributors to our portfolio’s performance this year, buoyed by better than expected momentum in demand for its 5G chips from Chinese smartphone makers. This is mainly driven by faster-than-expected adoption of 5G by mid to low-end smartphones, with Mediatek already having chips in its pipeline specifically designed for this market with competitive pricing. In turn, Taiwan Semiconductor Manufacturing (TSMC) has benefited from the same trend, as Mediatek is their customer. TSMC is one of the few companies that can mass produce high-end semiconductors. As such it doesn’t just benefit from a quick move to 5G but also from an acceleration of the development of new technologies like Artificial Intelligence.
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- 1 S&P Global, China's biggest insurers look to balance scale, value growth, 13 February 2019.
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