Remoteness: Accessing the best of emerging markets
Remoteness: Accessing the best of emerging markets
Jason Pidcock and Sam Konrad discuss the theme of “remoteness” and highlight where they’re finding the most attractive emerging market opportunities in Asia Pacific.
With a record number of elections being held globally in 2024, including those across the Asia Pacific region, the political and geopolitical backdrop is a particularly important consideration for investors this year.
In Asia, we have already had election results from Taiwan and Indonesia, though both outcomes were largely anticipated, with the status quo being maintained. Voting is set to begin in April for India’s national election, with results due in June; a re-election of Modi is looking like the most likely outcome following better-than-expected results for the BJP party in recent state elections.
However, it is election results outside of Asia that are likely to have the most significant impact on Asia Pacific (ex Japan) equity markets this year, and globally. All eyes are on the US election in November, the outcome of which, undoubtedly, will be far-reaching. If we were to see a win from Donald Trump, we could expect to see an escalation in geopolitical tensions, not only in terms of the US’s relationship with China, but with potential implications in the Middle East and Ukraine too.
In Asia, we have already had election results from Taiwan and Indonesia, though both outcomes were largely anticipated, with the status quo being maintained. Voting is set to begin in April for India’s national election, with results due in June; a re-election of Modi is looking like the most likely outcome following better-than-expected results for the BJP party in recent state elections.
However, it is election results outside of Asia that are likely to have the most significant impact on Asia Pacific (ex Japan) equity markets this year, and globally. All eyes are on the US election in November, the outcome of which, undoubtedly, will be far-reaching. If we were to see a win from Donald Trump, we could expect to see an escalation in geopolitical tensions, not only in terms of the US’s relationship with China, but with potential implications in the Middle East and Ukraine too.
Remoteness & connectedness
Against this challenging political environment, we believe our Asian Equity Income strategy, with a focus on “quality income” companies, should be well positioned to withstand shocks. We always incorporate top-down views on the domestic political and geopolitical environment, along with other macro factors, when making our investment decisions. If we do change our views as the backdrop evolves, an active approach with a focus on highly liquid stocks will allow us to adjust our positioning accordingly.
Recently, we have increased our exposure to tech companies as our conviction has grown in the sector; we believe several of our holdings should be primed to benefit strongly from the global rollout of AI over the longer term. These tech companies can be viewed as being part of our “connectedness” exposure – i.e. businesses which generate global revenues and are highly adaptable, global leaders in their markets – and have been beneficial to our strategy year to date.
At the same time, given heightened geopolitical tensions and potential flare-ups, we have also decided to top up our positions in a defence company and a gold miner, as well as adding to several positions in companies that we view as a play on “remoteness”. We identify the latter as companies that we view as being relatively insulated from the global economy – from geopolitical tensions, trade flows and embargos, among other factors – and therefore less likely to be impacted by what is happening elsewhere in the world. There are a number of highly attractive emerging market companies in the Asia Pacific (ex Japan) region that we believe should be beneficiaries of strong domestic growth stories instead.
Recently, we have increased our exposure to tech companies as our conviction has grown in the sector; we believe several of our holdings should be primed to benefit strongly from the global rollout of AI over the longer term. These tech companies can be viewed as being part of our “connectedness” exposure – i.e. businesses which generate global revenues and are highly adaptable, global leaders in their markets – and have been beneficial to our strategy year to date.
At the same time, given heightened geopolitical tensions and potential flare-ups, we have also decided to top up our positions in a defence company and a gold miner, as well as adding to several positions in companies that we view as a play on “remoteness”. We identify the latter as companies that we view as being relatively insulated from the global economy – from geopolitical tensions, trade flows and embargos, among other factors – and therefore less likely to be impacted by what is happening elsewhere in the world. There are a number of highly attractive emerging market companies in the Asia Pacific (ex Japan) region that we believe should be beneficiaries of strong domestic growth stories instead.
The best of emerging markets
India and Indonesia are the second and third largest emerging markets in Asia Pacific respectively, and both countries have a strong growth outlook. We believe that they both face lower geopolitical risks than other emerging markets in the region, such as China.
India is our strategy’s third-largest country weighting and our largest emerging markets weighting, at around 18% (as of the end of March 2024). It grew more than 7% in the 2023/2024 fiscal year, and it is expected to continue to grow at around 6.5% to 7% in the coming years. India has favourable demographics, with a huge, young population, and it is home to not only a number of global leaders but also several very attractive domestic consumption stocks.
ITC, for example, is our biggest holding in India. It is India’s largest packaged foods and beverages company, with a range of additional business divisions in areas like tobacco, agriculture and hotels. Three in four Indian households consume ITC’s food brands, and three quarters of Indian retail carries its food brands. ITC offers an attractive dividend yield, it has a strong balance sheet and a professional management team, and its shares are very liquid.
We also hold Power Grid, which is an Indian electricity transmission company. The company is benefiting from an increase in demand for electricity in urban states, as well as enabling connectivity in rural areas, which are being connected for the first time. We view Power Grid as an attractive play on India’s development.
Elsewhere, we are able to find exciting opportunities in Indonesia, a country which appears to be following in India’s footsteps in terms of its economy, with growth expectations of around 5% over the next couple of years. Our exposure there includes Bank Rakyat, which specialises in microlending, with a significant proportion of its loans being under US$100. Its customers live in very remote locations many miles from financial institutions, with no safe alternative financing options. Bank Rakyat offers high returns on equity and assets, strong margins, and an attractive dividend yield.
ITC, for example, is our biggest holding in India. It is India’s largest packaged foods and beverages company, with a range of additional business divisions in areas like tobacco, agriculture and hotels. Three in four Indian households consume ITC’s food brands, and three quarters of Indian retail carries its food brands. ITC offers an attractive dividend yield, it has a strong balance sheet and a professional management team, and its shares are very liquid.
We also hold Power Grid, which is an Indian electricity transmission company. The company is benefiting from an increase in demand for electricity in urban states, as well as enabling connectivity in rural areas, which are being connected for the first time. We view Power Grid as an attractive play on India’s development.
Elsewhere, we are able to find exciting opportunities in Indonesia, a country which appears to be following in India’s footsteps in terms of its economy, with growth expectations of around 5% over the next couple of years. Our exposure there includes Bank Rakyat, which specialises in microlending, with a significant proportion of its loans being under US$100. Its customers live in very remote locations many miles from financial institutions, with no safe alternative financing options. Bank Rakyat offers high returns on equity and assets, strong margins, and an attractive dividend yield.
Accessing EM through developed markets
We also have exposure to positive EM growth stories through several of our developed market-based companies. Some of our tech holdings, for example, benefit from strong and growing demand in Asia, as well as globally, including contract manufacturer Hon Hai, which makes Apple’s iPhones in factories based in India, producing mobiles for both domestic and global customers. We also hold MediaTek, which is one of the world’s largest chip designers, which sell more chips for use in phone than any other company by volume. While it is a global company, a lot of its chips are used by handset manufacturers in China.
Away from the tech sector, we hold positions in miners like BHP, which we believe should continue to benefit from selling commodities to countries like India as they invest more in infrastructure and electrification. In Singapore, we own banking group DBS, whose banks operate across the region; Singapore Telecommunications, which is also a play on regional growth, with a presence in India, Indonesia, Thailand and the Philippines; and ST Engineering, which we like due to its defence and Smart City divisions, as well as its aircraft MRO (maintenance, repair & overhaul) business.
Away from the tech sector, we hold positions in miners like BHP, which we believe should continue to benefit from selling commodities to countries like India as they invest more in infrastructure and electrification. In Singapore, we own banking group DBS, whose banks operate across the region; Singapore Telecommunications, which is also a play on regional growth, with a presence in India, Indonesia, Thailand and the Philippines; and ST Engineering, which we like due to its defence and Smart City divisions, as well as its aircraft MRO (maintenance, repair & overhaul) business.
Resilience in a highly political year
By combining exposure to well-connected global leaders with more “remote” exciting emerging market opportunities, we believe our strategy should be well placed to withstand the shocks and volatility in such a highly political year. We are confident about the longer-term outlook for the positions we hold in the strategy, though an active, unconstrained approach, with a focus on highly liquid companies, allows us the freedom to adjust our positioning if our opinions change.
Holding examples are for illustrative purposes only and are not a recommendation to buy or sell.
The value of active minds: independent thinking
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*In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong).and in Singapore, Institutional Investors as defined under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore.