The rise of east and south Asia

-- | 04/05/2018

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Glenn Freeman: In this week's "Three Top Picks" I'm speaking to Robert Mann from Nikko Asset Management. He is touching on the South Korean equity markets, Indian property and how China's changing consumer dynamic is creating opportunities for domestically-based companies.

Robert Mann: South Korea is an interesting market. So, it's always been the cheapest market in Asia and one of the major reasons often being North Korean risk that's been there since, I guess, the end of the Korean war. And so, in some respects, the recent noise late last year, early this year about Korea, the markets didn't really react negatively because it's already in the market. So, there's a huge potential upside, it seems to me, to Korean shares if we can make progress on peace on the Korean Peninsula.

Now, I'm not saying it's going to happen, because that's clearly very difficult, for anyone to know what will happen. But from a situation where you were very concerned about what would happen in any reduction in hostilities, or in animosity, is clearly a very good thing for the market. So, I think, that's an interesting market to look at. There are clearly some world-quality companies in Korea. The electronics space; Samsung is clearly the largest company in that market. They have done a good job at selling sort of some of their consumer brands into China in particular, the whole Korean Wave thing and sort of pop music Korean culture. So, there's a number of areas where Korea has done good things, but any news on North Korea, I think, is probably going to be positive, because the market has been expecting just so little.

Freeman: And Robert, how is the shifting from a black market towards a more formal economy in India impacting the property sector there?

Mann: Traditionally, in India, the property sector was not really part of the formal economy. A lot of black money used to be used to buy property. So, the whole move to sort of formalise the economy helps the listed property developers, at the expense of the unlisted guys, and whole part of the whole formalisation clearly helps the whole listed sector as against the broader economy.

And so, we think that the good property developers in India that are listed will do very well. So, it's not as if there are that many of them, but there are two or three that we think very highly of and are happy being overweight.

Freeman: Now, finally, on China, you are speaking about the Chinese consumer opportunity and specifically, on the retail products and in the education services. How do you see these opportunities evolving over time?

Mann: Everyone knows that China consumer story, it's been talked about for number of years. We see in the Australia and New Zealand markets companies like a2 Milk that sort of couldn't crack it can do unbelievably well. So, the demographics in China clearly favour consumption. Government policy is moving once again in the favour of consumption and services. So, you've got massive tailwinds behind the sector.

So, the real question is, who will benefit from the growth in Chinese consumption? Will it be foreign firms, the a2 Milks, the McDonald's, the Nestlés? Will it be other Asian firms or the Korean cosmetics guys? Or will it be the Chinese consumer firms? And I think that going forward, it will more and more the Chinese consumer, as their tastes get more complex, that they are feeling less of an inferiority complex that foreign must be better, as they get the safety -- food safety standards within the sight – within the sight of China moving higher, that the good marketing – the Chinese consumer companies that are very good at consumer marketing are getting a bigger and bigger market share. Now, it doesn't mean in every sector that will happen. But I think there are more of them to do that.

The other thing that the Chinese consumer does like, and all of sudden they show this ease out at spending on education. Education is clearly a very important part of Chinese culture. So, especially the cram schools to help the kids, they are all in China.

Obviously, Australia see some of it in sort of the University end of it. But the bulk of the money is obviously spent from different kindergarten up to the end of year 12. So, that's an interesting sector. It is getting very expensive at the moment. We're very careful of stock selection in that sector.

But we think that, in general, it will be more and more Chinese companies who understand their consumer and understand – and it's a very competitive market and things change very quickly. Being on the ground is pretty important, which doesn't mean that a KFC, which clearly has done very well in China, sort of can't do it. But just to assume that because a brand does well overseas, it will do well in China. I think it's too simplistic and actually quite dangerous.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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