Investors should beware of anyone telling them to buy Asian or emerging market equities because they are “cheap”, according to Schroders’ FE Alpha Manager Robin Parbrook, who says these areas of the market currently resemble “a pig wearing lipstick”.
The MSCI AC Asia Pacific ex Japan and MSCI Emerging Markets indices fell by 8.51 and 9.2 per cent respectively last year, which many experts say has created an attractive entry point.
Performance of indices in 2018
Source: FE Analytics
For example, Saker Nusseibeh, chief executive officer of Hermes Investment Management, described emerging markets as “the correct place to be” this year, adding: “China is slowing to around 6 per cent a year or below, but that is only natural and should have been expected. It is a very large economy and one cannot expect very large economies to keep growing at 14 per cent. Let’s not forget it is still doing much better than everyone else.
“Should we believe the Chinese economic number? It’s almost irrelevant whether it is 6.5 per cent, 6 per cent or 5.5 per cent. The growth of the Chinese consumer will continue.”
However Parbrook, the manager of the Schroder Asian Total Return Investment Company, is sceptical of this sort of assertion.
“I have been covering Asia for 30 years and a lot of the time I think Asia and emerging markets more generally get mis-sold,” he said.
“At this point, most people are saying 'buy emerging markets'. I was out marketing in France at a conference, listening to people give the usual spiel about emerging markets and it made me think, ‘are emerging markets being tickled pink or is it a pig with lipstick?’”
Parbrook has spent most of his working life in Asia, moving to Hong Kong in 1992. China has been the biggest growth story on the planet since then, with its GDP seeing a 25-fold increase – however, GDP growth obviously doesn’t equate to stock market performance and the manager called China “the most spectacular example of that”, with its stock market down by 25 per cent in dollar terms over the same period.
“That’s because most Chinese companies are very bad and went bankrupt,” he said.
“So the real story here is beware of emerging market and Asia specialists, strategists and fund managers who are just coming out and giving you the whole crappy spiel about how emerging markets have 3 billion people and rising GDP growth, because what actually matters is what is behind the growth.”
Parbrook takes a bottom-up approach to investing, aiming to pick best-in-class companies “regardless of whether they are exporters, tech companies, or domestic consumption plays”.
He said this is important as you don’t want to buy Asia for its beta – even though many people do – but for its alpha, pointing out that most trusts in the IT Asia Pacific ex Japan sector – 11 of 14 – have beaten the MSCI AC Asia Pacific ex Japan index over the past decade.
Performance of sector vs index over 10yrs
Source: FE Analytics
“I think that reiterates you can make money from this asset class, but don’t kid yourself you are miraculously catching rising middle classes,” he said.
“There have been stocks that have correlated brilliantly with the (GDP) index. The one that has correlated the best is Louis Vuitton. Because what do Chinese people buy when they get richer? They want to buy handbags. That is the key message. When you are investing in emerging markets or Asia, it is not just a case of buying the index.”
Parbrook said that assuming some sort of correlation between GDP growth and stock market performance is not the only mistake made by those backing Asia.
While many of them point to value being created by 2018’s fall, the manager said it is important to remember that the MSCI AC Asia Pacific ex Japan index was up by close to 40 per cent in dollar terms in 2017 – and a market that has risen by close to 20 per cent in two years hardly screams “buying opportunity”.
Performance of index (in $) over 2yrs
Source: FE Analytics
“As far as we see things from a valuation perspective at this point, things are pretty mixed: there are pockets of value, mostly in tech, semi-conductors exporters and financials,” he continued.
“But obviously there are quite big headwinds for some of those sectors. Whereas on the flipside, other parts of the market still look very expensive to us – consumer staples, domestic plays on China and some of the defensive sectors.
“We are also seeing quite a lot of earnings downgrades coming through as the impact of a slowing economy does impact Asian earnings.
“Historically, Asian earnings have been quite cyclical and I don’t see that really changing, but pockets of value should mean we can make some money this year.”
Data from FE Analytics shows the Schroder Asian Total Return Investment Company has made 69.17 per cent since Parbrook joined in March 2013, compared with gains of 36.71 per cent from its IT Asia Pacific ex Japan sector and 28.98 per cent from its MSCI AC Asia Pacific ex Japan benchmark.
Performance of trust vs sector and index under manager tenure
Source: FE Analytics
It is currently on a premium to NAV of 3.68 per cent, compared with a premium of 2.21 per cent and a discount of 1.94 per cent from its one- and three-year averages.
The trust has ongoing charges of 0.96 per cent and is 9 per cent geared.