Active management key to driving returns in Asia

19/04/2018

Download

​In this interview with Citywire Asia, Andrew Gillan, Head of Asia ex-Japan Equities and Co-Manager of the Asian Growth Strategy, discusses the reasons for his positive view on the region as well as favoured countries and sectors.

Improving macroeconomic conditions are always good for company performance and share prices. That has generally been the case across Asia as the global economy has improved. The increasingly positive outlook for China’s economy should provide an additional boost to companies across the region. Gillan and his team have been very positive on Asia since the start of the year; from a macro view they think Asian growth is likely to be higher than the rest of the world in 2018. 

While Asia Pacific ex Japan markets were down in US dollar terms in the first quarter of the year, they outperformed other major markets like the US, UK, Europe and Japan1. Furthermore, earnings per share (EPS) for the region rose by more than 20% last year, according to Bloomberg. Gillan expects further EPS growth of 10% or more in 20182.

‘Companies have played well to the global recovery led by the US and the European Union. The recovery in demand from China has come a little later,’ Gillan says.

Asian stocks have potential to strengthen further

According to Bloomberg, Asia Pacific ex-Japan equities posted strong performance last year, up almost 40% in 2017 in US dollar terms. Gillan believes the strong run can continue. A large portion of those returns was supported by earnings growth and Asian currency strength. Furthermore, the market structurally underperformed global and developed markets for the last four or five years. ‘The Asian equity re-rating is far from over,’ he says.

Global institutional inflows help bolster the case. Flows into Asia accelerated towards the end of 2017. Recent global volatility did little to undermine the positive sentiment. An influx of active money is also good news, thinks Gillan, as investors need to be selective.

China volatility remains a concern

Chinese tech stocks performed well at the beginning of the year, but in general some investors remain sceptical on China as market volatility is a constant concern. But, encouragingly, stimulus measures implemented by the Chinese authorities in 2016 have yielded positive results. Banks are tackling non-performing loans and supply side reforms.

‘This year we are seeing some of the value sectors, the beneficiaries of supply side reform and then the banks, starting to do well,’ he says. However, further reform may end up being risky. If the Chinese government steps up efforts to deleverage the economy, it may impact market sentiment.

India can do better

Reforms in India have also been under the spotlight. The economy is more domestically-focused, but there were significant implications for quoted companies from the demonetisation of 2016 and the introduction of the general sales tax. Corporate earnings fell short of expectations as a result.

Strong recovery in Korea

Elsewhere, North Asia has posted strong export recovery figures. South Korean cyclicals had a strong 2017. A pickup in global demand, allied with limited supply growth, has been good for Korean firms that produce memory chips for computers, smartphones and a growing list of connected devices.

Sector positioning

In his view, many tech stocks are now close to being fully valued, accentuating the need for selective stock picking. Gillan has lowered tech exposure as a result. Instead, his team has actively increased exposure to Asian financials as the region’s economies have improved. ‘The market assumption was that banks would benefit from rising US interest rates, but there has been a lag. Singapore bank shares have moved ahead of their earnings improvement but we still see improving return-on-equity and expect better margins to continue,’ says Gillan.

The consumer sector picture is also more nuanced, with a significant disparity in valuations across the region. It is not uncommon to see large Indian consumer stocks on 40x earnings, but Chinese consumer names have underperformed in recent years, opening up pockets of value opportunities. There are plenty of other selective stories to follow, for example, Taiwanese food staple companies are seeing increased demand from China for noodles and beverages.

Underweight Australia

Australia remains an underweight. Banking stocks dominate the market and are under pressure from the wide-ranging Royal Commission, which may put downward pressure on returns. ‘We think Australian banks will struggle to maintain their high returns. It was an easy decision to underweight,’ admits Gillan.

Value in Southeast Asia

In Southeast Asia, the team also sees more opportunities. These markets have been somewhat marginalised by exchange-traded fund (ETF) money targeting the larger index countries and Andrew has identified some value in some of the smaller markets.  ‘We have added to Malaysia as oil prices have recovered and forthcoming elections should be good for the domestic market,’ he says.

The Philippines remain a firm favourite as well. From a top-down perspective, the economy may appear to be overheating. Even so, the belief is that the well-run large conglomerates are diverse enough to ride out any hiccups. ‘Large index stocks were disproportionate outperformers last year,’ says Gillan.

He also says that because many Asian firms are family-run, active managers have the advantage of being able to monitor corporate governance levels to ensure shareholders obtain the best returns. Overall, ‘it is becoming increasingly important to be an active investor in Asia,’ Gillan concludes.

1 Source: Thomson Reuters Datastream, total returns 3 months to 31 March 2018. Past performance is not an indicator of future performance.

2Team views and forecasts may vary and are not guaranteed.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any sectors, indices and securities mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

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 and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Horizon Asian Growth Fund

This document is intended solely for the use of professionals and is not for general public distribution.

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued in Europe by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03 / 04 CapitaGreen 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors’ best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Share

Important message