Focus on Asia: Domestic demand key theme for Matthews Asia

Domestic demand within Asian markets is creating significant opportunities for long term investors in the region, says Matthews Asia’s Sharat Shroff, co-lead manager on the Pacific Tiger sub-fund of the manager’s Luxembourg Sicav.

The term Pacific Tigers may once have referred to a relatively small number of investible markets, but today represents a broader opportunity to tap into non-benchmark-constrained opportunities with long term rewards on offer, Shroff said.

He looks to bottom up driven investment opportunities in China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

The domestic demand in these markets has developed as the region’s growth story has changed from a focus on exports to consumption rising as new wealth is generated.

As a manager, Shroff is looking for long term themes, rather than reacting to short-term challenges and opportunities. Currently, for example, there is considerable strain between China and Japan at the political level, with stories of Japanese branded products suffering a sales slump in the Chinese market.

However, Shroff points to similar short-term periods in the past, which have not derailed the long term development of increasingly close trade and investment ties between the two countries.

There may be some short term volatility to be exploited and stock corrections. But this has to be placed in context of other facts, such as Chinese tourists being the second biggest group in Japan after Koreans.

Also on the theme of Japan and China, Shroff said that he looks for companies in China that may be looking to close the technology gap, including to competitors from Japan.

China’s role in the region remains dominant, Shroff suggests. It is the number one trading partner for India, and equivalent to trade with both the US and the EU for Korea.

It is important to distinguish between exports into China that are consumed there, versus those that are processed and re-exported. And it is important to identify new opportunities; one is palm oil, which is being consumed in increasing quantities across the region, although it is often used as an ingredient in value added products subsequently re-exported.

Amid the ongoing growth story of Asia it is also important to decouple the macro story from the micro story. Shroff notes that he does not pay too much attention to GDP figures, as there is little direct correlation to local equity markets. Far more interesting is looking for what opportunities are sparked as development reaches certain levels, such as per capita income of $3,000 – at which point consumers start to buy cars, mobile phones and other devices, and residential property. This in turn sparks local entrepreneurs, who create the businesses and local brands that Shroff and Matthews Asia research for possible investments.

Also requiring recognition is the fact that even if an economy is growing, it may not be investible because of the lack of a suitable capital market – countries such as Myanmar/Burma and Laos may be attracting foreign direct investment, but do not have a local stock market suitable to funds such as Pacific Tiger. The way to play the more frontier markets is to find companies operating there, but listed in more developed Asian markets such as Singapore. Visiting the operations of such companies in situ develops confidence that ultimately can lead to investments in those markets.

Development of local professional services are required for such markets to offer an investor such as Matthews Asia a suitable way in, but developing professional services businesses in turn become an area in which to consider investing across the region, Shroff adds. Wealth management is one such area, particularly as local people start to look for more complex solutions such as structured products. Such businesses may eventually consider seeking capitalisation in order to boost their own growth, that is, local stock market listings.

And as a long term investor in the region, Matthews Asia is ready to do the legwork now in the knowledge that more markets will become investible for an equity investor such as itself. The key is to keep looking for opportunity, Shroff said.

As a long term investor, there is also a key warning for investors to keep in mind, Shroff adds. Capital controls and the impact on foreign investors is something that Matthews Asia experienced in the late 1990s, when, for example, Malaysia effectively shut down its markets for foreign investors. Matthews Asia did not return to Malaysia for a long time thereafter, and it is therefore a key consideration when analysing market specific risk in the region.

Still, with a quarter of global foreign direct investment heading for Asia, it suggests that companies themselves see opportunities on the ground, and therefore suggest for investors such as Matthews Asia that there should be good return opportunities for their own clients if they stay the course.

 

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