As the strict Covid-induced lockdowns began to unwind across the globe, many wouldn’t have predicted the turbulence that 2022 would bring to markets, with inflation reaching levels we haven’t seen for decades in the developed world, and most major central banks raising interest rates to the highest levels since before the Global Financial Crisis.
But, despite such a challenging backdrop, the Asia Pacific region has continued to offer many attractive income and growth opportunities this year. By being selective and staying focused on identifying the most resilient companies in the region, we’ve been able to avoid some of the sharpest sell-offs.
Identifying ‘safe havens’
We view ourselves as top-down stock pickers, meaning we take the macro environment into account, but we do not try to make forecasts. We think it’s important to understand the environment that economies and markets are operating in, including the geopolitical and domestic political backdrops, as well as the current business environment and longer-term environmental risks. This leads us to form opinions about the countries we will consider investing in, as well as those that we view as too risky so choose to avoid.
Many still view the Asia Pacific region as an emerging markets play, though it is home to several developed market economies, with solid fundamentals. Australia, for example, can sometimes be overlooked and is often underrepresented in many portfolios. However, it is the largest country weighting in our strategy, which has worked well for us this year. Australia is a fully functioning democracy, it has a productive workforce, and it is home to a number of very successful companies with significant market shares and solid barriers to entry, with very few state-owned enterprises. Corporate governance is strong, and we believe Australia faces far fewer longer-term environmental risks there than many other countries do in the region, and globally.
Unsurprisingly, Australia’s mining and energy companies have performed particularly well this year, given strong rallies in energy and commodity prices. We have also seen relatively solid performance coming from other areas of the market, including the financials and industrials sectors.
Elsewhere, we continue to like countries like Singapore, which offers several attractive financials and telecoms companies, along with Taiwan, which is home to many world-leading technology companies. Outside of more developed Asia, we also have exposure to India, which offers strong growth opportunities in areas like financial inclusion.
Avoiding the riskiest areas
In contrast, we’ve become increasingly cautious about investing in mainland China over the past few years, given our concerns about its political nature, both domestically and in terms of its global standing. As such, we exited our remaining positions there in July, though we still have exposure to its economy through successful businesses located elsewhere in the region that sell to China. This decision has worked well for us, as a prolonged period of travel restrictions and lockdowns, along with ongoing regulatory clampdowns, have continued to weigh on sentiment.
More recently, sentiment has been hit further after President Xi Jinping was confirmed for a third term as Party Leader, filling the most powerful bodies with close allies, and breaking from a collective leadership model. We expect China to become a low-growth command economy as state intervention increases.
In terms of geopolitics, US-China tensions look unlikely to abate any time soon, too. In October, the US Department of Commerce’s Bureau of Industry and Security announced new rules aimed at restricting the export of sensitive technology to China, given its concerns about the use of these technologies to the detriment of US national security.
This combination of factors, along with unfavourable demographics, means we expect to see a significant amount of capital flee China as the situation deteriorates. Indeed, we are already starting to see shifts in allocations from some of the largest US pension funds, away from China and towards less risky countries in the region.
Focusing on the biggest and best
It’s not just about recognising the countries that we do or don’t like though – it’s about trying to identify the best companies in the region.
Many of the companies we invest in are considered global leaders in their respective sectors. We prefer those that look after their balance sheets and are willing and able to share their profits with shareholders. We like proven management teams and business models, reducing the need to speculate. While we choose to stick with many of our investments for years rather than months, we prefer to hold highly liquid stocks so that if we do change our minds, we can sell out easily.
A great time to invest?
So far, our positioning has worked well in a rising interest rate environment. Given strong net cash positions and low levels of leverage, we believe that many of the companies we invest in should be able to withstand a recession, and that many would be able to come out the other side stronger than their competitors.
Following the sharp sell-offs we’ve seen this year, some of the high-quality companies that previous looked too expensive or we didn’t feel offered sufficient dividend yields are now looking more attractive. We have taken advantage of market volatility by adding to some of our high conviction positions, as well as opening new positions in an Indian bank and a fast-growing global leader in power tools.
When investing in developing geographical markets there is a greater risk of volatility due to political and economic change, fees and expenses tend to be higher than in western markets. These markets are typically less liquid, with trading and settlement systems that are generally less reliable than in developed markets, which may result in large price movements or losses to the investment.
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