Asia outlook dampened at macro level, says Aberdeen’s Hugh Young
Hugh Young, managing director of Aberdeen Asset Management Asia and group head of Equities at Aberdeen Asset Management, has said that companies in Asia are increasingly working in the context of broader economic slowdown.
Pointing to data from the first and second quarters of 2013, he noted that assets such as Japanese, European and US equities had all performed better than Asia Pacific ex Japan. However, the trend of a challenging environment continues, as June saw falling PMI scores for most markets in the region for a third month in a row – excepting certain bright spots such as Singapore, Japan and the Philippines, although Aberdeen remains “light” on Japan compared to the benchmark MSCI AC Asia Pacific.
China is the main concern from a macroeconomic perspective, as the government there seeks to gain control of the shadow finance sector, and the debate balances between those who fear a hard landing and those who believe the government has the ammunition to act as a backstop to any further economic slowdown.
However, as Young noted, Aberdeen is not investing in a market such as China on the basis of broader trends, but is a stockpicker. What counts is finding good companies. Unfortunately, there are few on the Chinese mainland that he feels are worth investing in currently. “It has proved a difficult hunting ground,” he said, despite the large number of company visits Aberdeen has engaged in there compared to other markets in the region.
Asia’s other country with a billion-plus population is India. The challenge there is the opposite of China, Young said. There are many good companies, but the valuations are dissuading Aberdeen from investing more.
Looking to earnings, Young said companies in the region are in good shape. Consensus earnings figures from UBS, MSCI, and IBES presented by Young suggest that earnings growth is on a rate of about 14%.
Aberdeen is more cautious, citing issues such as wage inflation and its effects on margins. Young instead sees earnings growth of 7-8% this year and next, which would put the region on a third year of relatively slow earnings growth compared to historical means.
Companies are in good financial shape on the basis of measures such as net debt to equity, but on a forward price/earnings multiple of 14x against an estimated 8% earnings growth, Young said they are not “wildly” attractive, but that the market is “reasonably valued”.
Companies that Young finds attractive include DBS, the Singapore bank, and Siam Micro, the Thai retail company. He has been topping up mining companies such as BHP Billiton and Rio Tinto this year.
Small caps remain interesting, but the challenge to investors is that quantitative easing measures have covered the differences between small and large caps, he said.
As a stockpicker, he remains positive about finding good companies that are well managed. Instead the key challenge is to find stocks at valuations that Aberdeen feels offer decent investment opportunities
On a regional basis, he still feels that Asia offers relative value against others such as the US and Europe, he added.