Asian dragon lost its fire? – Asian Equities

The cultural diversity of Asia and the current headlines around China may send investors running to safer havens. But they have been given one piece of advice — keep calm and think long-term, Malavika Santhebennur writes.

Financial planners and investors worried about the present climate have been given one piece of advice when investing in Asia — think long-term.

The pessimistic data and news headlines around China would be enough to deter any financial adviser and investor from investing there.

China's enormous manufacturing sector was going through its weakest phase in three years at the time of publication, suggesting growth had slackened in the country.

Official data from the Purchasing Managing Index for August showed the index had dipped to 49.7, down from 50 in the previous month.

A figure below 50 indicated the manufacturing sector was running below par.

It would be easy to be drawn into the headlines around China at present, but Morningstar head of fund research, Asia-Pacific, Grant Kennaway, stressed the need for advisers to think long-term.

"You shouldn't be looking at these investments as anything other than a long-term opportunity, at least a three-to-five year view and you can allocate money to the region," Kennaway said.

"Advisers tend to invest in Asia in a thematic way. They often see it as an opportunity for clients to tap into a fast-growing region. They see investing in Asian equities as a way to get exposure to that growth."

So if advisers needed to have a long-term view, they also needed patience.

Director, Asia macro strategist at Saxo Capital Markets, Kay Van-Petersen, said the two things that would give any medium-to-long-term investor the edge, even with all the market professionals, unlimited access to information and systems, was time and patience.

"The way the market and business works now is so short-term; it's what happened today, what happened in the last half an hour, and 80-90 per cent of that is noise.

"But if you have time and patience, then that compound interest works for you," Van-Petersen said.

There was gold in them thar rocks

A recession would be a hazy memory for many Australians, since the last one was in the 1990s, thanks to the commodities boom.

However, commodity prices have plummeted, particularly oil, and many industry experts do not expect commodities to come back in the near future.

Rather than panicking about the current economic conditions in China, it would be more useful to focus the lens on what this means for the sustainability of growth over the long-term.

Head of Asian Equity at Nikko Asset Management, Peter Sartori, anticipated an eventual slowdown in economic growth in China, and predicted growth would reduce to between three to five per cent over the next few years.

He said Nikko had maintained this position for the last year and a half, and attributed it to the significant economic transition underway in China from an investment-export led growth, to a more consumption-led affair.

"That transition is unprecedented, particularly because of the size of the Chinese economy, and there will be a few hiccups along the way," Sartori said.

"But through this period, we think there are some really fantastic opportunities to buy Chinese listed companies in Hong Kong at the moment: very attractive valuations, and we have a lot of confidence that these companies are going to do well for the next five years plus."

The adage ‘past performance was not a reliable indicator of future performance' would ring true for China.

"The way the market and business works now is so short-term; it's what happened today, what happened in the last half an hour, and 80-90 per cent of that is noise." - Kay Van-Petersen

AllianceBernstein's (AB) chief investment officer — Asia-Pacific ex-Japan Value Equities — Stuart Rae, said Australian investors previously viewed Asia as strongly connected to the commodities sector, and were sceptical about whether it was worth investing there.

"So ‘why buy in Asia when I could buy BHP or Rio Tinto?' is what they were asking. I think that's a little bit of a reflection of the past when China was growing extremely rapidly in very materials-intensive ways," Rae said.

"I think it's not a good guide to future growth in Asia, and I think there's a decoupling now. While it may have been partly true in the past, I think it's even less true going forward."

But that was just one reason why Australian investors were reluctant about investing in Asia.

A PricewaterhouseCoopers (PwC) report, released in December 2014, explored why Australian businesses were missing the Asian opportunity.

It found only nine per cent of Australian businesses currently operated in Asia, even as Asia was set to produce half of the world's total economic output.

Moreover, 65 per cent of businesses did not intend changing their strategy in the next two to three years.

What's holding us back?

A survey of 1,013 Australian business directors and owners found the biggest obstacles for businesses were cultural differences, disinclination to deal with change, and the ability to work in an Asian setting.

The report said business owners and executives thought Asia was "very different", while many thought it was "uncomfortably so".

Many businesses shied away from Asia due to corruption, uneven playing fields, and legal and trade barriers.

They wanted to know what they were investing in and ensure whoever they were investing with were genuine.

Other businesses thought there was no demand or market for their products and services (35 per cent). But this overlooked the growing middle class population in Asia and their unmet demand for goods and services.

Other reasons for the reluctance to engage with Asia were short-termism and satisfaction with the status quo.

However, Rae said that government reform in both China and India, and a consumer-led economy in China would generate more interest in different stocks.

"You can find some deeply contrarian ideas like real estate, and none of those things are particularly related to commodities," he said.

AB's portfolio manager — China Equities, John Lin, said the Chinese real estate market saw a decent recovery in 2015 in terms of sales volume, value, and pricing of the underlying residential market.

"This is one area in China where you actually can find a number of listed developers that are reporting very good sales in 2015: by that I mean 20 per cent plus growth," Lin said.

But advisers and investors should keep the geographical footprint in mind when investing in Chinese real estate: developers who were exposed to bigger, tier one cities performed well.

"The second factor is the developers themselves. Some of the higher quality nationwide developers have a really decent balance sheet so their gearing levels are in the 30-40 per cent range," Lin said.

"But some of the really small cities are seeing a lot of oversupply and that will take a fair amount of time to work through."

Click here to read Part 2 of this feature: Looking Beyond China
Click here to read Part 3 of this feature: Currying your favour – India