Against a volatile and mostly uncertain global backdrop, Asia continues to be one for the few reliable sources of growth in today’s world market. 
With forecasts predicting this growth to continue – and at a faster rate than the rest of the world – we see a huge number of opportunities both for companies to take advantage of Asia’s structural economic growth story and for equity investors seeking to secure strong returns.
We believe that Asian smaller companies are best placed to capture these returns. Asian smaller companies’ shares have historically delivered strong returns over time, outperforming their larger counterparts, yet doing so with a similar overall volatility or risk.
While there exists a common misconception that small equals risks, by tracking the volatility of the respective MSCI benchmarks, this can easily be quashed. This also reflects the highly idiosyncratic nature of the smaller companies market – and as a result the low correlation and high diversification of even the more focused portfolios.
While many investors automatically focus on growth when approaching Asian smaller companies, taking a value approach to investing in this market has been shown to significantly outperform over time.
Investors who simply focus on growth and quality tend to over-pay for their stocks and hence lose their future equity returns. The most important factor for achieving equity returns over time is the price you pay at the outset – and so avoiding over-paying should be a key driver to stock selection.
This highly diverse market means that there are as many risks as there are opportunities and so a stock-specific, research-intensive approach is essential in order to pick the best of the bunch.
There is no easy way to approach this – it takes a great deal of time to source the hidden gems and even more time and effort to dig deeper and to ensure their future growth potential.
A true value approach naturally drives a contrarian bias and takes you away from popular household names and towards those stocks which are unloved and ignored. This is essential in order to take advantage of the mis-pricing and to exploit the behavioural biases of other investors who tend to over pay for growth and for names which are better recognised.
This approach requires discipline and conviction.
We use a range of objective quantitative valuation screens to source interesting investment candidates and spend a huge amount of time to truly understand the companies, the drivers of their earnings, the risks and rewards and, critically, look for a large margin of safety before looking to invest.
We prefer companies which have moats and franchise value and those which are currently under appreciated, or which have a differentiated proposition of a next generation business.
We also seek out companies with stable and predictable cash flow which provide us with higher margins of safety and a degree of downside protection.
We also like to invest in utilities – typically seen as the ‘boring’ option – but which benefit from strong cash flows. These firms tend to be neglected as the market gravitates to flavour-of-the-month opportunities such as biotech, e-commerce and so on.
We are currently finding the greatest investment opportunities in Asia in China, Hong Kong, Korea, Taiwan and India. Amongst these specific countries, while here are many firms purporting to be the ‘next big thing’, we find that digging a little deeper can help unearth the real value and to capture the true potential.
Krishna Kumar is a portfolio manager at Eastspring Investments. The views expressed above are his own and should not be taken as investment advice.