Ashish Goyal, CIO for Asia and emerging-market equities at Prudential Asset Management in Singapore, believes that investors will soon have enough information about the fate of the euro to return to looking at company fundamentals. That should bode well for Asian stocks, he argues.
How should investors with concerns about volatility view Asian equities?
Conceptually, we invest in businesses, not in stocks. What interests us is a company’s ability to deliver a stream of cashflows for, say, 10 years. So it’s not about what a stock’s price might do. In times like this, it’s critical to have a core belief about earnings power.
Nonetheless, markets of late have been dominated by ‘risk on, risk off’ trades that must affect your portfolio.
It affects every fund manager, but if you have a belief, that’s your anchor, and it helps you avoid getting whipsawed by volatility. When looking at equities as long-duration assets, volatility becomes an opportunity. In our portfolios we don’t engage in high turnover, but volatility can help us maintain our views as we add or reduce positions. Asian equities aren’t going to deliver 15% annualised returns – unless you are a long-term investor.
A lot of portfolio theory has come under fire. Is there still room for such a traditional view?
We’re at a point of acute disequilibrium. Central banks are holding interest rates at zero. Governments [in the West] are running fiscal deficits, despite having been downgraded by Standard & Poor’s. Governments have used up their options, both in fiscal and monetary policy. They risk following Japan. Intellectually, this is a challenging period.
That said, I’ve got two points. First, these problems are absent in Asia [ex Japan]. Things look good for us over the next three-to-five years. Second, as investors we recognise this situation, which means we have to be flexible, because the textbooks can’t tell us what’s going to happen next. The experience over the past 30 years is unlikely to inform us about what happens in the next 10 years.
Things are better in Asia, but how much of a worry is a Chinese hard landing?
It’s impossible to answer questions about any bubble there, although a hard landing is a low-probability event. We do over a thousand company visits in the region each year, and about a third of those are in China. We cross check those against a company’s competitors, suppliers and customers. We’re ready if new information comes to light. I think the Chinese government has the tools to manage its system and avoid any collapse in the banking or property sectors. But if there is a policy change, we can’t be dogmatic in our opinions.
How sustainable are the mega-trends supporting Asian growth? The populations of China and other countries are on the cusp of a major aging trend. China’s announced its population is now more than 50% urban. Wage inflation is rising. The growth miracle is finite and these markets could face a middle-income trap.
What you say is true but it plays out differently in each country.
Let’s take China. It does need to move its economy up the value chain. But it has a population that is used to hard work. Its infrastructure is ahead of current needs, which has been good for its exporters, but the need to invest now is in healthcare or soft skills.
I’d think that GDP growth of 6-8%, versus 9-10%, would be welcome, especially as the labour supply shrinks. I’d think that less investment into fixed assets will help China avoid the middle-income trap. The leadership understands this very well.
Where’s the opportunity as an investor?
There’s robust thinking in China today about energy and energy security, and how to price it. It will be hard for a Chinese company to, say, go acquire a big US oil major. But they are looking at what they can do around the edges, including investments in US shale gas. The government is trying to raise energy prices, within its political constraints, and we’ll see more of this if inflation eases. So Beijing is doing the right things. While there is scope for a policy error, I think China will come out of this okay.
We have 10-15 Chinese stocks in the regional portfolio. It’s easy to find good companies with excellent management at decent valuations. If you have such companies, the macro environment doesn’t matter so much.
What about other markets?
It’s a different story in India. There, the private sector is more capable than China’s. But the government is providing poor, or no, leadership. That said, every time India finds itself with its back against the wall, it does sensible things. It seems like we’re in that kind of situation now.
It faces challenges with regard to fiscal deficits and current-account deficits. India has undershot its growth potential for years. It could yet grow at 10% per annum for a long time, but only if it fixes its infrastructure and provides better governance.
What might such improvements look like?
I expect a movement on energy. It’s hard for companies to get clearance for mining-right approvals, for example. India needs to get its act together in coal mining, electricity transmission, and trains and ports to haul that coal. Otherwise it will face power shortages that hurt businesses everywhere. I think we will start to see more coal mines get approved, and see more public-private partnerships get sorted out. The government can’t afford to see the economy stall over a lack of energy.
What’s the best way, within the equities universe, to play the Asia story?
One strategy that’s been attractive lately is our dividend-focused portfolio. It can return 4-5% per annum in dividends alone. It’s a good place for risk-averse investors to go while they wait for better times to come.
Will markets in 2012 be as volatile as last year?
Maybe, but I think we’re close to moving past uncertainty in the eurozone. By the middle of this year, many of those issues will be resolved, for good or bad. If valuations remain unchanged by then, and people feel more certain about the outcome in Europe, I think valuations for many Asian companies will look attractive over the medium term.