Carmel Wellso is co-portfolio manager of the equity portfolio and all related portfolios at US asset manager Janus International, a position she has held since June. She is also an equity research analyst, primarily focusing on the financial sector.
Before joining Janus as a research analyst in June 2008, Wellso was a partner focusing on global financial services at Standard Pacific Capital. She has also served as director of Asian equity sales for UBS Warburg and an assistant director and Asian banking analyst with ING Barings Securities.
She gives her views on where she feels the most attractive financial stocks are to be found and is particularly keen on Asian equities.
In view of the major challenges facing the global financial sector over deficits, refinancing and liquidity, are there any investment opportunities?
It’s really on a stock-by-stock basis. These negative issues are already reflected in some companies’ share prices, offering attractive valuations for firms with strong balance sheets and solid long-term growth prospects. Many are high-quality franchises with a large amount of earnings coming from outside the EU.
Some also offer exposure to several long-term growth trends we are seeing in the financial sector. One example is emerging-market insurance, which we think is a secular trend that won’t be derailed by slower economic growth or regulatory changes.
Insurance in Asia offers very high wealth generation and high increases in GDP per capita. There is also strong growth and secular change in the insurance regulatory environment in those markets. Latin America is also very attractive to us, with low penetration in terms of banking and insurance products, both high-fee-generation and high-margin businesses.
Can you talk in a bit more detail about what Asia’s insurance business offers?
Life insurance is a particularly attractive area in Asia, primarily because it tends to follow the J-curve in terms of growth. As household income has increased in the region, the populations in these countries have continued to move from simply meeting their immediate living expenses to having disposable income. Asia has gone just beyond that initial starting point where people are starting to spend on additional things, including putting more money into life insurance and other financial products.
This is the stage that tends to experience enormous acceleration in demand, particularly in savings vehicles, and Asia is no exception. In fact, premiums in life insurance are growing 20-30% per year across Asia right now. Taiwan is probably the one exception. It is actually the most penetrated insurance market in the world.
Meanwhile, the high growth in China is mostly going to Chinese insurers because foreign insurance companies are not allowed by the Chinese government to expand aggressively. The growth in India is mostly through joint ventures with Indian firms.
Growth in Indonesia, Malaysia, the Philippines and Vietnam is also very strong. Singapore and Hong Kong have somewhat lower growth, because these markets are more developed. Generally speaking, insurance companies in the more developed economies tend to provide higher cash flows, while firms in emerging markets are primarily focused on high growth.
What other trends are taking place in the Asian financial sector?
Asia continues to be resilient and doesn’t face many of the handicaps seen in the European markets. Many of the liquidity requirements now being applied globally actually originated in Asia after the last Asian financial crisis [in 1997/1998], and the region has already dealt with these issues.
Standard Chartered is one example of a European bank with a strong pan-Asian franchise. Because it has had to apply the stringent Asian capital and liquidity requirements historically, it has tended to have higher returns and much stronger capital levels.
From a credit perspective, Asian banks have been a bit more cautious lending outside the region, in many cases refusing to provide foreign banks with more than overnight funds. In their own markets, these banks continue to lend to borrowers with the best credit. This is consistent with a global trend of less credit being extended to marginal and smaller clients that don’t have strong balance sheets.
Looking ahead, Asia offers much higher profit margins because it is a less competitive market, and these countries continue to have higher growth in credit formation due to higher GDP expansion. Consumer financing – a higher-margin business, which historically hasn’t been in the region – also continues to develop.
Profitability in Asia may be slightly lower than it has been in the past due to higher global funding costs, but we still expect it to grow at a faster pace that is well above the averages in other markets.
Are there any examples of European banks taking advantage of the opportunities in Asia?
It really extends across emerging markets, not just Asia. We think these countries are going to be the primary growth engine for many banks over the next few years. For example, BBVA [Banco Bilbao Vizcaya Argentaria] is a Spanish bank, but it also has the largest, most profitable banking network in Mexico, where return on equity is 40%, significantly higher than the current low-teen exposure in Spain.
An Asia-specific example is HSBC, which has a strong presence in the region. Asia has become a larger core portion of the company’s earnings, as countries in this region continue to see a stronger rebound relative to other markets. The strongest growth of the firm has been in private wealth management, as well as fixed income and equity issuance.
How does Janus research Asian financials?
Our analysts conduct extensive on-site research throughout Hong Kong, Singapore, Malaysia, Indonesia, China and India. We interview the companies we are evaluating, as well as competitors, and typically try to find people who have worked at the firms but may not be currently employed there. We also do various independent surveys to determine demand beyond what is published in broker and company reports.
Prudential offers a good case study for this process. When Prudential was thinking about buying AIA, the Asian operations of AIG, we did extensive research on the acquisition and spent a week in Asia meeting with employees of AIA, as well as employees who had left the company. We spoke to people who work for or had left Prudential. We spoke to the competition. And we did all this in China, Hong Kong, Indonesia and Singapore.
I met with specialists throughout the industry who were researching both firms’ various product lines and margins to figure out if the acquisition was likely to happen, if it made sense and whether or not the company was pricing below market.
We also spoke with regulators to find out if there were going to be upcoming changes that could affect distribution in various countries, as well as accountants to determine if there were likely changes in any accounting assumptions or policies that might improve or hurt company earnings.
At the same time, the Janus analyst who covers AIG here in the US was conducting a similar exercise to get a sense of the parent company’s views on its Asian business.
Even though Prudential did not make the acquisition, this research provided us with an extensive understanding of both companies. If and when AIA goes public, we now have very developed models on growth expectations, potential cost savings and productivity gains.