Hugh Young: Investors in Asia left dazed and confused


It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” The famous opening lines of The Tale of Two Cities by Charles Dickens eloquently describe the period prior to the French Revolution. But they could just as well be describing the contradictions in Asian markets this year.

Investors may be confused and with good reason. On the one hand, reform-minded leaders are at the helm of many of the region’s biggest economies and government finances are in better shape than they have been for some time. Meanwhile, cheap oil has boosted consumer sentiment and delivered an unexpected windfall for many countries.

On the other hand, economies are struggling to grow, maritime disputes in the South China Sea are stoking political risk and the prospect of US Federal Reserve policy pushing the dollar even higher threatens to curtail returns for many foreign investors.

Some Asian markets are on a tear. The MSCI India index returned around 14 per cent in dollar terms during the year to 30 April after dividends were reinvested. So-called A-shares trading in Shanghai and Shenzhen delivered a total return well in excess of 100 per cent in dollar terms over the same period.

For the region as a whole, the MSCI Asia Pacific (ex-Japan) index returned over 10 per cent during the past 12 months in dollar terms. Meanwhile, the MSCI Indonesia gauge delivered a modestly negative return following the rupiah’s depreciation against the dollar. Investing in Asia seems a lot like playing the lottery.

So what are investors to make of all this? For a start, this seems like a good time for caution because there is precious little correlation between corporate earnings and stock prices. For example, it is getting harder to justify Indian share prices at current levels without an improvement in revenues. Prime minister Narendra Modi has pledged to sweep away entrenched obstacles to growth but stock prices reflect changes he has yet to deliver.

Indonesia, like India, is another “fragile five” country that benefited from investor goodwill following the election of a “pro-business” leader. However, reliance on foreign funding means President Joko Widodo must maintain the pace of reform to satisfy heightened expectations. While cheaper oil has brought benefits (policymakers have cut costly fuel subsidies), lower commodity prices are also hurting this exporter of natural resources.

Political stability may have helped shares in Thailand achieve a total return of just over 7 per cent in dollar terms over the past year but this has come at the expense of political freedoms. The country’s post-coup military rulers maintain a tight grip on the economy, which struggles to gain traction even as tourism shows some signs of recovery.

Elsewhere, Chinese share gains are the envy of the world as the nation’s retail investors, starved of attractive alternatives, flock to the stockmarkets amid speculation Beijing will do more to cushion a slowing economy and support asset prices. Last month’s decision to permit mainland mutual funds to trade Hong Kong-listed shares via Shanghai has channelled some of the euphoria into the semi-autonomous former British colony.

That is because share prices have been inflated by speculation and, in an operating environment that remains tough, company revenues are often flattered by foreign exchange gains when dollar-denominated overseas earnings are booked in a weakened home currency. Then there is the impact of US monetary policy to consider. Policy “normalisation” this year may be a good thing because it points to US economic strength and weans markets off speculative capital but the prospect of a rate hike could compel fund outflows from Asia in the near-term, damaging investor confidence.

Another concern is the collapse in commodity prices. Lower oil prices may have brought benefits to the region but cheaper commodities also hurt Asian economies that rely on sales of natural resources. A reduction in Chinese demand is largely to blame as Asia’s biggest economy balances the need for growth with essential reforms designed to fix structural imbalances and boost sustainability.

While a slowing China is a worry for everyone, policymakers have the resources to cushion the economy from a “hard landing” as well as safely deflate any asset bubbles. This may prove to be a watershed year as the US central bank plots an exit from the emergency measures that followed the global financial crisis, even as policymakers elsewhere remain committed to the stimulus that has boosted asset prices.

Given these uncertainties, investors would do well to go back to basics: embrace businesses that are easy to understand, look for companies with broad regional exposure, established franchises and solid finances, and seek out firms that respect minority shareholders. Then, when all the boxes are ticked, do not overpay.

These are tried and tested strategies our managers in Asia have employed for more than two decades. They should prove useful at a time when nothing seems to make sense anymore.

Hugh Young is head of Asia Pacific equities at Aberdeen Asset Management.