Asian Markets

Still hand picking each investment in Asia

By Hugh Young, Managing Director of
Aberdeen Asset Management Asia

• Introduction
• Search for quality
• Allocations within the region
• Economic outlook for Asia
• The effect of low interest rates
• Risks and our portfolios

 Introduction

I have been investing in Asia for nearly thirty years and we have been based in the region for nearly 20 years now.

We have one of the largest teams in Asia and a consistent track record of 25 years of investment with Aberdeen making us one of the most experienced investors in this part of the world. We are long-term bottom up fundamental investors. We never invest your money in a company without having first undertaken considerable due diligence in that company both before investing and repeatedly each year thereafter. Typically we hold shares in a company for the best part of ten years.

 Search for quality

In companies, we are looking for quality, by which we mean a business that we believe that will grow, and grow profitably over the next five to ten years or more. That involves looking at company accounts to make sure we understand them and are comfortable that each company is properly financed. We then look at management – the depth of management and the professionalism of management. Alongside that is the issue of governance and transparency. We only invest in companies where we are comfortable that the boards of directors understand their responsibilities to us, and indeed to our investors as long-term shareholders.

The team consists of over 20 investment managers. We cross-cover the region and we support each other so that no one individual is responsible for one stock. We have team responsibility and team coverage. Given Asia is such a large region, the Aberdeen advantage is that we have been covering Asia consistently for 25 years.

We make over 1,500 company visits a year, but we have distilled our investment universe down into a smaller number of high quality companies that we feel comfortable with for long-term growth. And that means we invest in a portfolio of around 60 companies within the Asia Pacific region.

 Allocations within the region

If you look at our portfolio in terms of geographic allocation, you will see that we have substantial holdings in companies listed in Hong Kong and Singapore, as being the most established stock markets of the region. These companies have a sustainable track record of governance through good times and through bad times, which is where you really do notice company qualities. We also have substantial investments in the fast growing markets such as India and to a lesser extent China itself directly. The theme behind many of the investments is the long-term domestic growth within Asia. Whilst we do have exposure to the exporters of Asia, which is so much of Asia’s visible success, the long-term story of Asia is about the domestic consumer.

 Economic outlook for Asia

As we know, the Asia Pacific market collapsed from the tail end of 2007 and fell very sharply, worse than many other world markets, but has recovered exceptionally well from the first quarter of this year. One of the questions we have now is whether the crisis is over or not.

There has been a rebound and we have seen a sharp pick up in GDP growth over the last couple of quarters, all the more sharp because it fell so deeply a year ago. Exports have picked up along with domestic demand. Industrial production has also increased from very low figures. Governments have been spending in this part of the world, I hope from a position of strength, so the amounts of money are quite substantial but relative to cash balances are very affordable. Asian governments are not putting the next generation in debt, that one could argue has been the case in the US and UK.

 The effect of low interest rates

Interest rates in this part of the world continue to be low resulting in loose credit markets across the region. Australia recently upped interest rates – a good thing in our view – and we read that positively. But governments are generally keeping rates low and that has had consequences on the stock markets, which have risen on the back of poor interest rates available to people from banks. Consequently, more money has gone into speculative assets. Much as we saw correlations on the way down, with all assets falling, so we have seen them rise again, not just in the stock markets but in the property markets as well.

Where does that put equity markets now? Stock valuations look much dearer than they did only six months ago. Looking at dividends in Asia, compared to returns from a bank account for example, yields in Asia still look attractive. But the stock market valuations are higher now, trading on 20 times earnings. We have become more positive on this year’s earnings though as they come through.

Generally our earnings estimates will be nudged up and most have come in slightly better than expectations.

But we do have concerns looking ahead. The bottom line of our view of the recovery is that we do not think we are back to the good old days. The improvement in economies and markets recently is largely a result of quantitative easing by governments. The big question we ask is – what will happen when the flow of money stops?

In many ways it would be healthy for markets to have some sort of pull back or consolidation. But the long-term growth prospects for Asia means that investments in this part of the world are as attractive as ever and probably more attractive than most other regions in the world. Being long-term investors, our optimism remains unchanged, with quality improving and companies in the region not succumbing to the temptations others else where have fallen to.

 Risks and our portfolios

The big risk going forward is what happens when quantitative easing stops and how this will affect markets, which is the main concern of many market participants. But for us, we will continue to focus on the issues on which we have a handle. For example, we are examining the political risk associated with the King’s health in Thailand. This has been ongoing and to some extent explains our concentration in more stable countries like Singapore and Hong Kong.

The financial crisis has somewhat justified our stock picking process. In a rising market this tends to be less important as it is easy to make money, but in the turbulent freefalling markets we saw in 2008, our process of picking good quality companies has certainly paid off.

As a consequence we made very little changes to our portfolios through the crisis. One purchase we did make was Hong Kong Exchanges, which was a slightly more aggressive move for us. However, within a week of buying the position, the stock had rebounded strongly we sold the stock within eight weeks of buying it. We usually hold securities for eight years! As markets have rebounded we have moved our portfolios to be more defensively positioned, into companies such as Unilever, and have removed those companies that bounced exceptionally strongly. But other than that we have simply remained true to the companies we like.