After years of disappointing earnings Asia surprised on the upside in 2017 and could continue to surprise going forward, according to Schroders’ Matthew Dobbs. 
The veteran fund manager said countries such as Korea surprised on earnings results last year with earnings per share growth estimates defying historic precedents.
Dobbs (pictured) noted synchronised global growth has benefited Asian markets, leading to a high proportion of the region’s purchasing managers’ index (PMI) – which indicates the economic health for the manufacturing and service sectors – now in expansion mode.
“We have had good trade PMIs; the start of the year was maybe half the countries of the world in positive territory but by the end it was almost 95 per cent,” Dobbs noted.
Nikkei ASEAN Manufacturing PMI
Source: Markit
The manager of the five FE Crown-rated Schroder Asian Alpha Plus said last year was good for Asian equities as global growth and increased consumer spending are supporting trade.
“When people do have a little bit more money in their pocket, they still do want a new TV, and luckily, it generally comes from Asia,” he said. “Trade is very important stuff for Asia as many Asian economies are extremely open and dependent on the rest of the world.”
Regarding Capex – the cash companies spend to buy, maintain, or improve their fixed assets – Dobbs said it has been very disciplined across all Asian countries.
He said: “Even China by their own standards have dialled it in quite a bit when it comes to capital expenditure.
“The only country that has had rather more than usual is the Philippines, and that is the one country where from a macroeconomic viewpoint we have hit a bit of a wall, because suddenly having a very high current account surplus it has gone quite sharply into deficit. The same thing with credit growth.”
He noted that many companies his funds are investing in have stronger balance sheets than they have ever had and are also being quite cautious about capital spending.
“The big spike in Capex in 2017 was almost entirely due to Samsung putting a lot of money into new display technologies,” Dobbs noted. "Most responsible corporates in Asia are being quite cautious about life.”
When it comes to valuations, the Schroders manager said price-to-book and historic price-to-earnings (P/E) figures show that while the region’s valuation in aggregate are no longer strikingly cheap but remain attractive.
Asian Valuations
Source: Schroders
Additionally, when considering the fundamentals, the Schroders manager said the region is still at an attractive point in the cycle.
He explained: “Markets are already reflecting a bit of a tightening in US policy; whether that is enough, I don’t know, but to me that is a slightly better position to be in than when everyone assumed they remain zero forever.
“Very low interest rates were transmitting themselves into a little bit of a ‘bubble-y’ situation in Asia in 2012 and 2013. Then Bernanke [Fed chairman from 2006-2014] opened his mouth.
“This was painful at the time, but it instilled an instinctive tightening of policy, a tightening of exuberance. Consumer debt in Thailand was no longer growing once Bernanke opened his mouth.”
Dobbs noted: “One of the reasons I rather like Asia as an investor, is that social security isn’t very good. They save, they are self-reliant, they are self-dependent. The family matters, work matters.
“You survive only by your own wits and your own industry, and there is no EU grant around the corner to bail you out.”
This has also been seen in the region’s largest economy – China – where debt has been an issue of concern for many investors.
He added: “I think China is shifting the way they want growth to come through. They are recognising that the old guard of just add more credit and hope is not going to guarantee the multi-year survival of the communist party of China. Adding 10 or 20 per cent to your credit to GDP ratio is not sustainable.”
As such, given the current macroeconomic backdrop, the Schroders manager said Asia is increasingly becoming a more interesting place for bottom-up stock pickers, adding the outlook for the region is positive as long as the current environment of global growth persists.
Matthew Dobbs is sole manager of the £940m Schroder Asian Alpha Plus, the £802.7m Schroder Asia Pacific investment trust and the £665.1m Schroder Oriental Income investment trust.
Performance of fund vs sector and benchmark under Dobbs
Source: FE Analytics
Over the time Dobbs has overseen Schroder Asian Alpha Plus, the fund has delivered a 229.17 per cent compared with a gain of 114.74 per cent for the average fund in the Asia Pacific excluding Japan sector and a 61.95 per cent gain for the MSCI AC Asia excluding Japan benchmark index. The fund has an ongoing charges figure (OCF) of 0.95 per cent.