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Schroders' Lee: Three headwinds for Asian markets

Lee King Fuei, co-manager of the Schroder ISF Asian Total Return fund, considers the challenges facing Asian economies and how investors can take advantage of them.

Rob Langston

By Rob Langston, News editor, FE Trustnet
Friday February 17, 2017

Asian markets recorded strong single-digit growth during 2016 but were overshadowed by bigger year-end returns in western markets.

Yet despite being home to some of the world’s fastest growing economies, there are a number of headwinds facing the region, says Schroders fund manager Lee King Fuei.

The head of Asian equities (Singapore) and co-manager of the five crown-rated Schroder ISF Asian Total Return fund and Schroder Asian Total Return Investment Company says Asian economies face three medium-term headwinds.

The first, demographics, looks at the impact of ageing populations in Asia and how this affects economic growth.

The second headwind considers the effect of debt and the lack of deleveraging on economic growth, while the third measures the impact of disruption.

Performance of funds over 3yrs

  Source: FE Analytics

The fund manager, who works alongside FE Alpha Manager Robin Parbrook, believes an ageing population is likely to have a big impact on the region over the next two decades.

Lee says an ageing population means the workforce will shrink and become less productive, as seen in developed economies.

Ageing populations in Asia also mean that governments will be forced to increase spending on healthcare. However, it can also provide opportunities for investment.

The healthcare sector represents a 5.1. per cent weighting in the Schroder ISF Total Asian fund portfolio.

Among healthcare stocks, Lee says it likes Resmed – a US company – a ‘global leader in the sleep apnoea’. The manager says companies focusing on sleep apnoea have access to "a huge, underpenetrated market".

While deleveraging has been a key theme in Western economies since the onset of the global financial crisis, Asian economies have seen greater lending.

Lee says China’s debt-to-GDP ratio reach 282 per cent during the second quarter of 2014, higher than other major economies.

“Since 2014, banks have gotten even worse,” he said. “Economic growth in China has been slower in the past couple of years, so the government have pumped more money into the system.”

The fund manager says the Chinese recovery in growth more recently has been driven by further debt, exacerbating the leverage problem faced by authorities.

One of the other big challenges for Asian economies in the coming years is the impact of disruption technologies that have the potential to drastically change the way economies function.

Although technological disruption can lift productivity, Lee notes that it can slow GDP and put jobs under threat as more roles are replaced by automated processes.

Meanwhile, disruption also affects the way people consume, says the manager, with greater focus on dematerialisation with people spending greater amounts on services rather than goods.

“Consumption has started to change,” he explained. “Instead of spending their free time consuming, people are spending more and more time consuming digital media.”

The trend towards dematerialisation is one of the themes present in the portfolio, says Lee. The manager says he avoids traditional retail stocks, whose business models are no longer compatible with current consumer spending habits.

Another area avoided by the manager is the energy sector, which he believes is also likely to be affected by the dematerialisation theme, with energy consumption falling across the world.

With a shift towards cleaner energy sources and the emergence of new technologies, such as shale energy and renewables, fossil fuel-focused stocks have come under increased pressure, particularly since the fall in oil prices more recently.

Performance of Brent crude over 3yrs


Source: FE Analytics

This shift towards cleaner energy sources and developments in battery storage has in turn led to the manager to eschew the auto industry where the rise of electronic vehicles has had a bigger impact in recent years.

The manager says the emergence of disruption as a key theme in markets more recently has also shed greater light on the role of exchange-traded funds (ETFs) in deriving growth in the future.

Lee says disruption can destroy wealth, particularly as half of the MSCI AC Asia ex Japan index is represented by sectors under threat from technological disruption.

“Benchmark or ETF investing is going to be challenged,” he said, “At the best of times it’s about buying today’s winners tomorrow.”

Active management allows funds to be more reactive to shifts in the way the market operates, the manager says. Bottom-up stock selection allows the Asia total return team to pick stocks in an environment where Lee believes valuations are neutral.

A further theme avoided by the manager is the ‘chase-for-yield trade’ which has emerged more recently, says Lee. More recently low bond yields have forced investors into higher yielding equities to support income.

However, the manager says it has become a ‘crowded trade’ and now bond yield have begun to rise since the election of Donald Trump and the rise of right-wing populism, which he says is inflationary.

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Managers mentioned in this article

Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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