Andrew Gillan, Head of Asia (ex Japan) Equities at Henderson highlights in this interview risks and opportunities for 2015 in Asian markets.
What lessons have you learned from 2014?
It has been a year of divergence between individual markets within the region. This is partly politically-driven, with the change in leadership in India and Indonesia buoying those markets. But we have also seen other ASEAN (Association of Southeast Asian Nations) economies like the Philippines and Thailand perform well. Despite dollar strength, the traditional export economies of North Asia have not really benefited in terms of stock market performance despite relatively cheap valuations in China and Korea particularly. Volatility has increased through the year but Asian markets have held up relatively well following QE tapering, and the fall in commodity prices and oil should broadly benefit the region looking into next year.
Where do you see the most attractive opportunities within your asset class in 2015?
India remains one of the most positive markets but valuations also reflect that. We remain overweight as we still feel that the investments we have in financials, consumer, pharmaceutical and IT services can continue to generate significant profit growth and superior returns over the next few years.
What are the biggest risks?
Clearly the risk is that the economic reforms stall but the types of companies that we have exposure to have delivered impressive returns even in a weaker political environment. Our favoured holdings include both HDFC and affiliate HDFC Bank, Tata Motors, personal care, health care and food products group, Dabur, IT and outsourcing services group, Tech Mahindra, and pharmaceutical group, Lupin.
What is the highest position of the portfolio?
In absolute terms, China remains our highest country position at more than 20% of the portfolio and we have a mix of both new and old economy companies in addition to good consumer exposure. Despite the negative headlines and the reality of adjusting to a lower headline rate of growth – although importantly, better quality growth – valuations look attractive and company fundamentals are positive. There will be repercussions from the excessive loan growth of the last decade but I would also expect policy support to keep the economy on the right track. Favoured holdings include Baidu, which dominates the internet search market. This market continues to expand at an impressive rate, particularly from mobile communications, and the company is striking a good balance between investing for the future and profitability, as it monetises its market leadership position. In the consumer sector, we have exposure to auto companies, Brilliance (BMW’s joint venture partner) and Dongfeng Motor (partnerships include Nissan & Honda), which continue to offer good growth prospects and look attractively priced.
Are you more positive or negative now than you were 12 months ago on the economic and investment outlook? Why?
The regional index is broadly up in line with earnings growth for the year so that offers some comfort although we have seen stronger moves and consequently higher valuations in certain markets. In the short term, lower commodity prices should be positive for corporate earnings in Asia. Longer term, progress on reforms in the larger markets could provide a boost to equity markets and support the already positive macroeconomic investment case for Asia. Demographics, relative fiscal strength and a higher rate of growth ensure Asia looks favourable relative to other regions.
