How appealing are Asian stocks?

-- | 02/07/2020

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Glenn Freeman: In this edition of "Ask the Expert" I'm speaking with Robert Mann, Head of Asian Equity and Peter Monson who is a Portfolio Manager also in Nikko Asset Management.

Robert, let's kick off with you. How bullish are investors on Asian stocks at the moment?

Robert Mann: Yeah, it's an interesting question, because to me a bit surprisingly foreign investors don't seem to be that bullish. There're been quite large withdrawals from Asia sort of around the peak coronavirus worries and since then we really haven't seen very much money come back into Asia. And then, I guess, why do I say surprising, well, I think there's a number of reasons.

First of all, Asia has done a really good job at combating the virus whether it's China, Hong Kong, Taiwan, Vietnam, Thailand, obviously Australia and New Zealand as well. So, the bulk of the region has done a really good job. Secondly, it's interesting that it's a region where in general people don't mind wearing masks where people do as they told and where people probably don't shake hands or touch each other as much. So, maybe it's something there which reduces the chance of a second wave. Thirdly, I think there's a lot of trust in the government. Governments have done a good job. So, people trust the governments and to getting economies going promptly, you need trust because you need to do the CapEx to buy the big – to make the decisions about the future and I think trust in governments in Asia is actually very strong. Balance sheets are strong in the region.

People talk about deglobalization as one of the topics. But what's interesting about COVID is that it hit services and then your hard hit areas are obviously tourism, but it's food and beverage and those sorts of things. And apart from a small number of countries in Asia like Thailand, Asia is an exporter of goods not of services. And as we all know now, we're stuck at home; we're probably buying more goods as we are spending less on services. So, the net impact on Asia is actually not (large) either.

So, within the region, governments have got pretty strong balance sheets. So, they can spend more money and monetary policy unlike the west which is sort of at max and can't do much more, there's still room to cut rates here. Chinese rates, while historically looked low, but in a global sense actually looked quite high. So, there's a number of reasons why Asia should have done better and why there should be more interest. But obviously, at least to-date, that hasn't happened.

Freeman: Does the political uncertainty between Hong Kong and China affect investor appetite and likewise between U.S. and China and other countries?

Mann: Yes, obviously, there's a whole lot of issues tied in there together. So, it seems to me – let's say, it looks pretty clear that Trump does want phase one of the trade deal to stand. So, what would I observe is that that deal still seems to be on which takes some of the extreme risk away. The Hong Kong law, it's obviously been on the front page for a while. When things are on the front page of the paper, normally it's already incorporated into share prices, which is our view. China clearly has thought hard about this. They've made the decision that some security on the ground and stopping protests is really important to them and they're prepared to risk some U.S. retaliation.

Now, exactly what the response will be, we just don't know. A lot probably depends on how bad are the demonstrations. Are the demonstrations – how the police retaliates et cetera. So, it's still early. But I'd would have thought that if anything that the security will be tougher in Hong Kong. There will be less demonstration, therefore, there's less sort of trigger for the U.S. to retaliate and that the really extreme retaliations, which we're not expecting, hurt Hong Kong a lot more than China. So, in general, we don't regard this as a negative for the market in Hong Kong in the short term. The one thing that it probably does do is speed up the move back or the de-listing from the U.S. markets of the ADRs which was already happening. But once again, we don't think that's a negative for the Hong Kong market as such and actually may even help some Hong Kong companies.

Freeman: Peter, if I can turn to you for a moment, your Asian fund holds between 40 and 60 stocks. How is this portfolio positioned now compared to how that might have been three to four months ago?

Peter Monson: Sure, Glenn. Well, the overall number of stocks probably hasn't changed too much. But the composition has obviously changed quite a bit because the pandemic really was an unprecedented and systemic change for a number of industries and countries. So, a few examples of things we did – so, we offloaded tourism and energy. Tourism, we think, particularly sort of outbound tourism is one sector that's probably really structurally compromised for quite some time. Energy likewise just a big demand drop and a lot of geopolitical risk also happening in that market. So, it's not something that we deem (indiscernible) being in. And we kind of use the opportunity – there was a real sort of panic sell-off kind of in March to add some really high-quality names in the portfolio. But particularly, in areas like healthcare, digital consumer or digital discretionary and some really high-quality financials, a couple of which are based in Hong Kong.

Freeman: And just in terms of the country breakdown?

Monson: So, in terms of the country breakdown, obviously, this was another area that we really evaluated during the downturn. As Rob has discussed, some countries have dealt with this far better than others and some are equipped with sovereign balance sheets and healthcare infrastructure to deal with it far better. So, we really prioritized allocating towards those countries and de-risking from perhaps some of the more emerging countries for having a lot more issues with lockdowns and with the spread of the virus.

Freeman: Sure. And just finally, I'm not sure probably either of you could jump in on this one. But how reliable is the data that we get about Chinese companies, say, now versus in the past? I know especially for investors that are in Australia and other markets outside that region it's always been a concern.

Monson: Yeah, I'll take that, Glenn. So, I think it's improving with more coverage engagement and scrutiny. Obviously, the opening of A-share markets has been a real significant event for us

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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