Please note the disclaimer at the end of this Blog.
2018 was the first year of negative returns for Asian markets since 2011. However, we believe there remains cause for optimism as despite the fall in share prices, corporate earnings and dividends continued to grow so equities now trade on significantly lower valuations than at this time last year. This means that the market is discounting more risk than in recent years and, assuming recession is avoided, offers improved prospects for a positive market response to any better than expected economic news. Given current valuations equities are now more attractively priced for long-term, selective investors.
Witan Pacific currently has four external managers, Aberdeen Standard Investments, Dalton Investments, Matthews Asia and Robeco. We asked each to comment on the region’s performance in 2018 and the outlook for 2019 for their strategies.
Aberdeen Standard Investments:
“The market sell-off in 2018 looks overdone and we’re seeing substantial value emerging in certain stocks, sectors and markets. We continue to have heavy exposure to the financial sector. The rising interest rate environment would lift net interest margins of larger banks that have big low-cost funding bases and liquid balance sheets.
In 2019, we expect Asian markets to remain sentiment-driven around prevailing macro themes of US-China trade tensions, Fed tightening, dollar strength and oil price volatility. On the political front, Asia is also bracing itself for some key elections, particularly in India and Indonesia.
In the tech sector, the short-term outlook remains challenging but we remain structurally positive over the longer term, with Asia at the forefront of disruptive trends such as electrification and automation.
Elsewhere, we have been increasing our exposure selectively to onshore China. We see huge potential in China, where long-term growth is underpinned by favourable demographics, rising wealth and urbanisation as well as a huge domestic market.
In Japan, the recent Nissan scandal highlights the need for good corporate governance and we have been doing a lot of work here in terms of engaging our companies in governance as well as risk and capital management. Encouragingly, companies have been increasingly receptive to engaging with us and are keen to hear from us how they can do better. We have been happy to collaborate and we intend to continue building on our recent successes.”
Falvia Cheong, Head of Equities – Asia Pacific ex Japan
“2018 has been a difficult year in general for Asian markets and in particular for our strategy. However, we believe that we are entering a period which is affording us the opportunity to purchase high-quality Asian companies at material discounts to their intrinsic value. While there may be further short-term pain in Asia, we believe that the investments made in this period may translate to strong long-term returns. We are particularly positive on the opportunities in China, India and Korea.” Dalton notes that these markets are attractively valued following the recent sell-off.
“Clearly there remains the potential for a serious worsening of the trade war between US and China, but we do not believe this is the most likely outcome. We also note policy support from the Chinese government has begun.
While things have not looked pretty in India from a macro perspective, corporate earnings are on the rise. We also believe the macro headwinds impacting India may be settling, with the recent cooling in oil prices.
While Korean companies have historically shown poor corporate governance standards, reforms have begun, which we do not feel are being appreciated by the market. We are beginning to see material change in corporate behaviour, in terms of a reduction in cross shareholdings and an increase in the number of companies paying dividends.”
Jamie Rosenwald, Senior Portfolio Manager
“At present, headlines, sentiment and short-term momentum are overshadowing some important long-term considerations. Trade conflicts have taken a severe toll on sentiment, but fears of additional equity market declines stemming from trade impacts have been driven more by sentiment than by calculus or fundamentals.
Asia earnings in 2019 are coming off a very low base, and clearly have room to grow and valuations are highly attractive for investors with a long-term view. As prices for Asian equities have fallen this year, our view has become increasingly optimistic, and many of our strategies are taking advantage of low valuations to add to high-quality existing names in their portfolios, laying the groundwork for more durable and sustainable growth when markets recover.
The dividend yield for equities across the Asia Pacific region is 2.9%. That is higher than it has been for more than 90% of the last 15 years.”
Robert J Horrocks, Chief Investment Officer and Portfolio Manager
“As an Asian regional equity manager I look back on 2018 with frustration but I look forward to 2019 with enthusiasm. Frustration about the fact that our value approach didn’t bear fruit in 2018. Although growth did not perform well, value didn’t really come back because inflation remained elusive. Enthusiasm is there over the salivating multiples we can buy at in Asia after a wave of negative sentiment has engulfed the region.
Inflation expectations have cratered down to zero in Japan. However, we think tightness in the labour market will eventually bring higher inflation. The Japanese equity market has traded once again as a global cyclical, where global growth worries have depressed the market excessively. The exit from QE will be very slow, so liquidity remains plentiful. After the exodus of foreign money, local funds dominate the market with a focus on expensive quality. Japanese corporates have given very cautious guidance for 2019 and cash flow is held back by investment. In meetings we can sense this may be an excuse for Japanese companies to slow down the journey towards better shareholder returns even though balance sheets are rock solid. This leaves me a little frustrated. But I also feel enthusiasm over the outlook as foreigners will likely come back to buy in 2019 and will then go for the abundant value.
Elsewhere the earnings outlook will be the key factor to monitor. The earnings growth outlook has deteriorated due to global growth and trade war worries but still forecasts mid-single-digit growth for 2019. Regional valuations are now approaching financial crisis levels. That to us is a mispricing of the generally healthy fundamentals of Asian economies. Asian corporates will need to show they can manage through more difficult times without losing their focus on shareholder returns in which case we believe markets will recover in Asia in 2019. Worries are abundant and sentiment is very depressed. This enthuses me because I love to buy when expectations are low!”
Arnout van Rijn, Fund Manager
Witan Pacific - Discrete Investment Performance
Source: Morningstar, total return includes the notional reinvestment of dividends. Annualised figures updated each calendar quarter. The benchmark for the Witan Pacific Investment Trust plc is the MSCI AC Asia Pacific Free Index (£). For more information please go to www.witanpacific.com/legal-information
Please remember past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of currency or market fluctuations and you may not get back the amount originally invested.
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