Young, manager of various open- and closed-ended Asia portfolios including Aberdeen Asia Pacific and Aberdeen New Thai investment trust, says there are plenty of good companies that pass Aberdeen’s strict screening process, but very few are "hidden gems", meaning that he has to pay up for owning them. While Young points out Asian stocks have become cheaper in the last six months or so in light of the recent soft patch for the region, he says investors should not get too carried away in their expectations, as predicted earnings growth makes current prices far from cheap.
"Growth of earnings within Asia has slowed for the last two years and will slow again in 2014," he said.
"What’s exciting for us is the number of quality companies we’re finding with strong balance sheets. In our large cap portfolio [Aberdeen Asia Pacific], net debt to equity is at about 15 per cent, while for the small cap portfolio [Aberdeen Global Asian Smaller Companies], net debt to equity is at just 5 per cent."
"On a relative basis, Asia is more attractive than other developed markets compared with six months ago, but that doesn’t mean they are attractive on an absolute basis."
Performance of indices over 1yr
Source: FE Analytics
"A price to earnings [P/E] ratio of 13x or 14x is not wildly attractive. Asia is reasonable value, but we’re not really finding any hidden gems."
He points to Japanese property as one of the few areas where he is currently finding some untapped bargains.
Young says Asian small caps, which have had a terrific run over the last decade or so, are particularly expensive. He also highlights certain south east Asian markets as looking toppy.
"Small caps have slipped on to a marginal premium relative to large caps," he explained. "They, and particularly our fund, have performed very well, but the argument that they are dirt cheap compared to large caps is no longer the case."
Performance of trust and indices over 5yrs
Source: FE Analytics
"Is there loads of value in them? No, there isn’t. We’re not finding any hidden value there."
"In the ASEAN region, valuations certainly vary. In Malaysia, valuations have certainly gone up after a good run; in Singapore you can still find some value; the Philippines has performed very, very strongly and is expensive relative to the region; and Thailand has also done well. You can find OK value there."
"I stress we are finding plenty of quality companies, but just not always at a good price."
The one exception of a country that does not boast plentiful quality companies is China, in Young’s opinion.
The manager says he is confident that China will avert a major crisis, but does not see it as a good value-play because so few companies prioritise their shareholders' interests.
"There are two schools of thought over China at the moment – either that there is an impending collapse at the hands of the shadow banking system, or that things are rosy because the government’s pockets are deep enough to intervene," he explained.
"We are somewhere in between. We suspect that the government will be able to rescue the banks if called upon as they are essentially an arm of the government themselves. Chinese banks are 60 to 70 per cent owned by the government."
"In this respect, I have a degree of sympathy with those saying everything is going to be alright."
"All of this is academic though, because on a company level there’s a very short list of companies that look after the interests of their shareholders."
"We have exposure to China via Hong Kong and through the likes of Rio Tinto and BHP Billiton, which supplies it with iron ore, but not directly. We comfortably visit more companies in China than anywhere else, but so far it hasn’t really rewarded us because we struggle to find appropriate stocks for the funds."
Young’s Aberdeen Asia Pacific fund currently has just 5.5 per cent in China. Hong Kong is the largest weighting, at 25.9 per cent.
He says the situation in India is the complete opposite to China, because there are plenty of quality companies but challenging political and social issues, which makes investing in the region difficult. India currently has an 11.7 per cent weighting in the fund.
Young has headed up portfolios at Aberdeen since the 1980s and has become one of the most respected Asia-focused managers over the period.
His flagship Aberdeen Asia Pacific fund and Edinburgh Dragon Trust have comfortably and consistently beaten their MSCI AC Asia Pacific ex Japan benchmark in the medium- and long-term.
Performance of fund and trust vs index over 10yrs
Source: FE Analytics
The likes of Aberdeen New Thai IT, Aberdeen Global Asian Smaller Companies and the Aberdeen New Dawn IT have all also consistently outperformed.
The Aberdeen Asia Pacific fund has recently closed to new investors, but the majority of Young’s other portfolios remain open.
