Hugh Young, Managing Director of Aberdeen Asset Management Asia, comments:
“Economies experience cyclical slowdowns and those in Asia are no exception. But some investors have confused it with a structural, permanent change. Asia’s investment case is as compelling today as it has ever been with region in good health. Governments have strong finances, consumers are not overleveraged by Western standards, and more importantly, corporate balance sheets remain healthy and debt levels manageable. There are challenges. Political risk has increased notably in Thailand, India and Indonesia, and this has the potential to knock management of these economies off course. However, valuations look attractive on a historical basis, trading at an estimated P/E of 12.3 times for the calendar year 2014. Earnings growth is likelyto be modest, in the high single digits, but corporate balance sheets are strong.
On the general election in India:
“India’s frustration with the ruling Congress Party[is setting/set] the stage for a resounding victory at the polls for NarendraModi of the BharatiyaJanata Party (BJP). Expectation is high that he will bring the same pragmatic zeal that he’s shown in his home state of Gujarat to the national stage. Naturally we hope the next government has the will to restart reforms and stalled infrastructure spending to rejuvenate the economy.
“India is experiencing its slowest growth in a decade, at 4.7% in the last quarter.Although the country’s current account deficit has narrowed significantly, inflationremains high. Food prices are creepingup again and slowing consumer demandhas put the brakes on new spendingby companies. That said, the country’sprospects are well-supported by a hugedomestic market, a young and growingworkforce, and an expanding middle class.
“We’ve been fans of corporate India for a long time. Companies we invest in are well run and have a strong shareholder culture. For example, HDFC, a leading mortgage provider has excellent quality assets. Another company we admire is Godrej Consumer Products, a home-grown maker of household and personal products with a leading position both domestically and in other emerging markets.”
On Beijing balancing growth and credit concerns:
“Our view is that the government has probably accepted the need to rein in excess credit creation – the key symptoms of which are shadow banking and property speculation – for the sake of long-term economic growth. Publicly, it may adhere to still-high GDP targets; much will be made of any new spending, too. But if rebalancingis to work, inflation will have to stabilise and real wages be boosted by productivity. The recent clampdown on corruption shows both the new leadership’s desire to consolidate power and, more importantly, its need to keep social order in the face of widening income gaps.
“We think earnings growth for companies will be muted, probably below 10%. Operating conditions for businesses remain challenging given the weaker environment in 2014. Corporate profits are down and sentiment has been affected by tighter credit policies. As for our portfolio, we see little indication of financial stress among our holdings thanks to their healthy balance sheets and cashflow generation, as well as sustainable business models.”
On why he favours companies located in ASEAN countries:
“We like the broad consumption story which is underpinned by low debt, credit expansion and rising wealth. It is relatively straightforward to analyse and there are some good quality stocks. Many local companies have in-built advantages, such as distribution and supply networks, while regulations may help limit foreign competition. Further, they may be family owned, conservative in approach and have low borrowing levels. This often translatesinto a net cash position and solid returns on equity and assets.
Hugh and his 30 strong team of investment professionals manage over €35 billion invested in Asia Pacific equities. The team carries out rigorous first-hand research on companies before they buy them to ensure they satisfy Aberdeen’s quality criteria. The checklist includes strong finances, regard for minority shareholders, good corporate governance, sustainable businesses and solid long-term prospects. Then the team makes sure the company is fairly priced. This process continues even after a company is introduced to a portfolio.