Global equity investors need to be more nimble with regard to Asia stocks in case the market falls prey to exuberance, warns Jason Pidcock, London-based director of portfolio management for Asian equities at Newton Investment Management.
He stresses he is “very comfortable” with Asian equities in his global emerging-market portfolios, and remains willing to hold even very expensive stocks in areas such as Chinese consumer goods and retail.
However, he says there’s a chance that Asian equities could face a bubble-like situation in 2011 as more global investors set their sights on the region – a process that could accelerate as the US Federal Reserve system carries out its second round of quantitative easing.
So-called QEII is likely to push investors out of the dollar and out of cash as the Fed prints money to buy its own long-term bonds, thus keeping yields very low.
“Recently we have trimmed some of our more illiquid positions that have done well,” Pidcock says. “We’re not getting out of these stocks, but we’ve reduced a few positions so that we are not later forced into any kind of sell-off if we need to meet redemptions down the road.”
Pidcock says a repeat of the sort of frenzy for emerging-market stocks as the world experienced in 2006-07 is possible. If he feels such an inflation is taking place, he is prepared to rotate into more defensive stocks, particularly those paying dividends, or shift more to cash.
He says the firm’s greatest inflows of late are to its Asian dividend fund, which has now seen assets exceed $1 billion.
More companies in Asia are paying dividends, and pay-out ratios held steady during the 2008-09 downturn. Strong earnings-per-share growth has allowed more companies to maintain or increase dividends; strong balance sheets give them the confidence to do so; and more domestic institutional investors are extending their investment time-horizons and are more keen on income.
Pidcock says that at this point most valuations are fair, and he does not yet see the kind of bubbles that Asian stocks experienced in 1993, 2007 or during the tech boom of 1999.
The level of IPOs, secondary market placements, and overall euphoria has not taken place. But the more illiquid markets could be vulnerable to such activity if too much capital begins to chase opportunities in the region.
Newton is not yet turning defensive, because the upside remains considerable. Rather, the firm is ensuring it has the flexibility to adjust its portfolio in case things hot up next year.
“Valuations are still at sustainable levels, but if there is asset-price inflation, it could happen swiftly,” he says. “That could lead to general inflation, and when things like food and oil become too expensive, that’s when the authorities have to take action.”
Newton, a thematic investor, favours stories benefiting from Asia’s various population dynamics, which shape consumption and savings patterns. Each country has quite different profiles, but for the next five years or so, China’s demographics make its consumption story very compelling, says Pidcock.
He expects the country can maintain high levels of GDP growth until 2015 or so. “But even if growth falls to 5-6%, many companies in China will do very well,” he notes.
He has a number of companies in his portfolio that benefit from domestic demand, from childcare to furniture manufacturers. “We take a five-to-10 year view that can justify high price-to-earnings ratios because we expect these companies to maintain high compound growth rates,” he says.