Mike Kerley, of Henderson Far East Income Limited, talks about opportunities in Asia’s economies:
Unfortunately, in recent times, developed markets have been veering on a downwards trajectory as global growth concerns come to the fore once again. The negativity is built on a number of fronts: geopolitical issues and poor macro-economic numbers adding fuel to deflationary fears in the Eurozone; the possibility of disorderly sell-off as the US Fed starts to raise interest rates; idiosyncratic scenarios such as ISIS and Ebola materially impacting investor sentiment.
In contrast to the developed market gloom, the Asia-Pacific region is, we believe, different: there’s a powerful ‘reform’ agenda creating specific catalysts which may drive markets there. With changes of leadership in China, Thailand, India and Indonesia, a region-wide clampdown on corruption and a drive to improve efficiency, investor perceptions are beginning to shift for the better, along with share prices. The improving backdrop warrants a closer look.
Chinese SOEs – the lumbering giants are getting fit
State-owned enterprises (SOEs) have been instrumental in the Chinese economic growth story. Recently however, there has been a drive to reshape these bloated structures into companies focused on shareholders rather than market share or job creation.
The hope is those SOEs with improving operating efficiency should contribute to China’s economic growth, reinvigorate private sector investment and help revitalise the economy by creating a more competitive business environment. Coupled with President Xi Jinping’s well-publicised anti-corruption measures, this is likely to improve investor returns in the medium-term.
India – powering forward
Across the Bay of Bengal, ‘Modi Mania’ for the newly-elected Prime Minister, Narendra Modi, is beginning to drive real change in political and economic attitudes. Expectations are high, and there is already evidence of the new administration beginning to address legacy stalled projects, by simplifying project approval and land-acquisition processes.
Coal India is one beneficiary. With a virtual monopoly in domestic coal production, a lot of cash on its balance sheet, an undemanding valuation and increasing commitment to return cash to shareholders (as highlighted by the recent special dividend), we view this as an attractive investment proposition.
Korea – tapping reserves
The newly-installed Finance Minister, Choi Kyoung-hwan, recently announced a raft of tax measures aimed at unlocking billions of dollars in corporate cash reserves. Investors hope this will boost the historically low dividend yields of Korean companies, and hence raise share prices.
We exercise some caution however. Hyundai Motor, with low valuations and a large net cash position, was poised to benefit from the reforms, but recently it announced a substantial land acquisition which has depleted reserves and disappointed investors. It goes some way to show that while there are changes being made at the government level these have not necessarily trickled down to the corporate level yet.
Indonesia – bringing the islands together
The people of Indonesia, and the third largest democracy in the world, chose Jowoki Widodo in July as their president following the failure of Susilo Bambang Yudhoyono to push through necessary reforms.
Undeniably a long list – first in line is energy, where fuel subsidies have led to an over-reliance on oil and a 20% strain on the total government purse. It’s not an easy task as, even though the knock-on effect frees money for other reforms (around $30bn), it risks social unrest with the impact felt by many companies and individuals alike.
Other reforms include education and agriculture, and infrastructure investment, where a focus on ports, railways, toll roads, and dams (for farming), should serve to decentralise manufacturing and release pressure from crowded urban areas.
Mike Kerley is Fund Manager of Henderson Far East Income Ltd at Henderson Global Investors.