For investors in Asia who know where to look, the answer, according to M&G Investments’ David Perrett, is yes. In this exclusive interview with IFA Magazine, David discusses how he and his team are finding value in Asian markets and why they believe that concerns around China are overstated.
With over 30 years’ experience as an investor in Asian markets, it is fair to say that David Perrett, co-head of Asia Pacific Equities at M&G Investments, has faced close to every possible investment opportunity, challenge and success. In this conversation with IFA Magazine’s Brandon Russell, David shares his views about why he believes that now is the right time for advisers and wealth managers to be considering Asia and China as an investment prospect, arguing why concerns surrounding China present an opportunity rather than a problem.
M&G Investments, through their considerable resources as investors in this area and their long- standing reputation, have clearly put themselves in a position from which their experienced stock-pickers are able to take advantage of investment situations that many others may miss.
In this Q&A, David reflects on how his team’s continued active engagement adds further value to their capabilities. He also goes on to explain why a ‘value-added shareholdership’ approach not only works in Asia but also allows M&G’s team to make a positive change that allows for greater success for both the companies and shareholders alike.
It offers advisers a powerful insight into exactly how M&G are utilising their considerable resources and expertise to capitalise on the stigma surrounding China, as well as how and why his team’s knowledge of the market gives them such an investment advantage in the region.
IFA Magazine: When it comes to investing, why Asia and why now?
David Perrett: “Valuation is a powerful reason that supports ‘Why Asia, why now?’ and there are many factors weighing in on it.
“Firstly, whilst some may have concerns about China, we think these are slightly exaggerated. Secondly, in the past, when the Fed was raising rates, there’s always been a concern that it is very bad news for Asia. However the last 10 to 15 years, there has been a change in how Asian economies run monetary policy. They’re much more flexible now and they set their own policy for their own needs. Again, we think those concerns are slightly exaggerated. The final reason is that we see important structural change happening in the corporate sector. There is a greater focus on profits, greater focus on increasing shareholder returns and increasing dividends.”
IFA Magazine: There’s clearly risk investing in China but where and why do you see the investment opportunities in that market?
David Perrett: “There are obviously serious economic challenges facing China. The most important of these is the health of the real estate sector and the impact that is having on broader economic activity, given how important real estate is for the economy.
We’ve known it for a while now but it’s worth remembering that China consciously decided to try and take some of the air out of the real estate bubble back in mid-2020. The impact of the measures has been greater than they probably expected. But again, if you think from a structural point of view, if you asked investors five years ago what their biggest concern was, it would be the real estate bubble and when it’s going to burst. But now, China is dealing with that. The overriding point here is that whilst concerns about real estate are real, it has an impact on activity, but they’re dealing with it. That’s the key risk, as real estate weighs on economic activity.”
“However, I think the positives and the opportunities are three-fold. Firstly, from a renewable energy transition point of view, while China has a lot of progress to make as it’s a large polluter today, it’s actually making huge progress. It’s the largest producer of solar panels and wind turbines and it’s already installing at a tremendous rate, transitioning its economy.
“They’re leading the world on electric vehicles which again is another important structural trend. A number of companies have exposure to this, which have basically been sold down due to general concerns about China, but actually have got very strong structural tailwinds.
“The other thing to bear in mind, and it’s particularly important coming from a Western perspective, is that inflation is incredibly low in China. Therefore, unlike in the UK where we are worried about higher interest rates, in China, inflation and interest rates are low. Typically, this is a good backdrop for financial assets on a medium- term view which should be remembered.
IFA Magazine: What are some of the key investment ideas, themes and opportunities that your research has currently highlighted from a pan-Asian perspective?
David Perrett: “Obviously, there are big global concerns about economic growth, inflation and interest rates. Therefore, what we’re trying to look for are those areas where, despite being impacted by these concerns, the concerns themselves are exaggerated or misplaced. We do have exposure to the shipbuilding and the bulk shipping sector. These sectors are typically seen to be very cyclical. But what’s interesting and different here is that the global shipping fleet has to transition away from oil towards cleaner energy. The reality is that there is insufficient shipbuilding capacity to do that quickly or easily, which means there is a tighter supply than normal. That means that, structurally, the demand/supply situation is much more favourable in shipping and shipbuilding than it has been for many years. So, whilst it is a cyclical industry, we think that over the next 10 or 15 years it has got more positive structural tailwinds behind it.
“A further area that we like across a number of economies in the region, in places like Korea, Hong Kong, Singapore, is that a number of the financials, especially the banks, are trading at very large discounts in valuation terms. That’s partly, again, because of the global concerns that we’ve seen with Silicon Valley Bank in the States and elsewhere and worries about interest rates. Our sense would be again, that these banks should be much more immune to global concerns. They are very well capitalised; they’ve got very careful supervision and they’ve got very strong bad debt provisions as well. Thus, the underlying profitability of these banks is quite strong, and the valuation does not reflect that because of these more global concerns. So we see an interesting opportunity for regional banks too.”
IFA Magazine: Why does a ‘value added shareholdership’ work in Asia?
David Perrett: “Value added shareholdership can mean several different things. One reason that it works in Asia is that compared to a number of companies in the West, Asian companies potentially, despite some being the real leaders in the area, are behind the curve when it comes to ESG, particularly on the environmental side. Therefore, they’re looking for a long-term partner to work with to help them improve on a number of these different metrics. At M&G, with our 150 plus years of investing and strong brand recognition, they know that we can be long-term partners, and we can really work very well with them. They take our ideas and suggestions on board and can raise the level of operations and governance as a result. We have people who work closely with a team and we ourselves engage in companies specifically to try and improve these metrics. In general, on ESG, there’s a big scope for some places to catch up, and we can really help them with best-in-class performance. We are seen to be a partner that they can trust and work with.
“In addition to that, being a long-term investor and long-term partner when it comes to capital management, we’re not seen to be somebody who’s asking for a quick return and then leaving again. We can help advise on higher dividend payouts or other more thoughtful approaches to capital management to boost shareholder returns. In particular, because of some of the valuation discounts, when you do have success in changing policy on dividends and elsewhere, you can have a large and positive impact on valuation. We can also help with specific campaigns around diversity etc. which, with our pedigree and our background of being seen to be a long-term partner who’s here today and here tomorrow, we get a very strong hearing, and we can help shape policy going forward.”
IFA Magazine: What has changed in your time managing Asian equities?
David Perrett: “Obviously quite a few things. I first started looking at the region in the early nineties. Interestingly, when I first went to China in 1993 it was seen to be, not quite a backwater, but certainly it wasn’t seen to be a major economic power. When people talked about Asian powerhouse economies they mentioned Korea, Taiwan, Singapore, Hong Kong – not China. Now, of course, China is the second largest economy in the world, and it’s the dominant economy in the region by far. Just the rise of China, in just 30 years, is quite phenomenal. Obviously there are positives and negatives associated with that rise but the scope of change has been off the charts.
“The other key change to highlight from an investor perspective would be that 20-30 years ago it was focused on growth at all costs: that’s what the companies and economies really cared about. I think that now there’s definitely a shift towards growing smarter, cleverer. It is more that the return on invested capital and profitability, focusing on what you’re good at rather than try to do all different things, is the road to success.
“However, if you asked me what hasn’t changed over the years I’ve been looking at the region that’s interesting too. I lived through the Asian crisis, a tech boom, SARs, the GFC, we’ve had COVID
and booms and busts with real estate in China. Consistently, there seem to be sharp swings in sentiment; euphoria to despair. I’ve seen a number of them in the past and it seems that doesn’t change. In some ways is tiring and leads to a few too many grey hairs but if you are a disciplined stock picker, those kinds of swings in sentiment do create more opportunities. Why? It means that really good companies get sold down and at other times, average companies become very expensive. I think if you’ve got a good framework and you’re a good stock picker, it does create better opportunities.”
Acting on the opportunities
To summarise, David and the M&G team have the resources and experience to spot attractive investment opportunities.
Concerns still appear in many conversations about China but, through active engagement and clever stock-picking, M&G have found and added value where there previously seemed to be very little. David’s wealth of experience allows him and his team to see the value in seemingly challenging situations and thus benefit from them.
Ultimately, the ‘value-added shareholdership’ approach adopted by M&G in Asian markets has allowed them to both spot and create opportunities for success. This, combined with their abilities to see trends and in sound and effective stock-picking, has made for an efficiently brilliant combination.
The views expressed in this document should not be taken as a recommendation, advice or forecast. The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested.
For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776
About David Perrett:
David Perrett joined M&G as Co-Head of Asian Investment with 28 years of investment experience and was appointed to the management teams of the Japan and wider Asian strategies. David was previously with Oxford-based Port Meadow Capital Management, a boutique investment firm he co-founded with Carl Vine in 2014. Prior to that, he was a Managing Director and Senior Portfolio Manager with UBS, specialising in investing capital across the Asia Pacific region and was based in Hong Kong. David also served as Chief Investment Officer, Life and Institutional for Prudential Asset Management (Hong Kong), having begun his career with Prudential (London) in 1991. David holds a Bachelor of Science, Economics from the London School of Economics and a Master of Science from the University of London.