The report 'Have Faith In The Future' from an event co-hosted by Value Partners in Geneva for local allocators outlines factors supportive of China A-Shares. These include strong free cashflows, a favorable outlook for consumption, the government’s 'Value Up' program focused on shareholder returns and growing domestic institutional allocation to equities.
Portfolio managers from Allspring Global Investments, Zennor Asset Management, Value Partners and Tata Asset Management recently pooled their expertise and expectations around Global Emerging Markets, Japan, China and India in Geneva, Switzerland, to an audience of allocators and fund buyers in Switzerland. The following pages summarize the key investment opportunities and insights presented by each manager and a summary of the panel discussion conducted between managers.
Allspring Global Investments
Leading off in order of presentation was Alison Shimada, Fund Manager of the Allspring Global Emerging Market Equity Income Fund.
Shimada, who has been active in the industry since 1985, stressed the risks for those investors continuing to ignore GEMs based on past events. Today, these markets exhibit faster economic growth rates than developed markets; offer accommodative monetary policy; have companies attaining strong earnings growth; and where investors can benefit from valuations discounts and diversification benefits.
Investors need to understand the fundamental impact that artificial intelligence (AI) will have in GEMs. Shimada noted the ubiquity of AI globally and the speed at which it is being adopted including in emerging markets. However, added to that is the strong position of GEM companies in the supply chain of AI. With expenditure by data center and chipset suppliers forecast to grow significantly in coming years, this is creating opportunity for companies providing the ‘picks and shovels’ behind AI provision and integration. Meanwhile, GEMs themselves are not lagging when it comes to using AI. Examples include autonomous driving in China, digital culture in Korea, healthcare in India, and media and entertainment creation in Latin America. Amid the benign macro backdrop and strong micro stories, Shimada stressed the need for investors to conduct fundamental analysis into the opportunities being spotted: “You must do stock by stock research,” she noted.
The AI opportunity is widespread within EM
Zennor Asset Management
There was a time when Japan was considered the future, and a plot of land in Tokyo was claimed to be equivalent in value to all of California. That did not last, and several decades later the local stock market has finally recovered to peak levels.
Considering the new future of Japan was James Salter, Fund Manager of the Zennor Japan Fund, and with some 35 years of industry experience. Salter touched on what he sees as the cornerstones of the investment thesis facing current investors in Japan. These include an ongoing and increasingly entrenched corporate governance shift; significant levels of cash on balance sheets that are being returned to shareholders; and the opportunities beyond large cap companies, particularly given the dearth of analyst coverage – an estimated 50% of local stocks have no or limited coverage.
Abundant Value in Japan
“There is a complete lack of research in Japan,” Salter highlighted.
For activist managers prepared to engage with companies this market represents a significant opportunity to unlock value through buybacks and dividends – supported by the policy environment that has brought an increasing number of companies in scope of improved governance and stewardship commitments on behalf of shareholders.
As ever, investments in Japan must also consider the exchange rate factor. However, the yen recently has been significantly under-valued against the dollar on a historical average basis, and this represents another opportunity should it revert to that historical range, Salter added.
Value Partners
The topic of investors missing out on value was also flagged up regarding Japan’s near neighbour China, as Luo Jing, Fund Manager of the Value Partners China A Shares High Dividend Fund outlined factors impacting the local equity market.
One is the decreasing drag of the property sector on GDP, as it is forecast the negative impact on GDP will disappear by 2025. Meanwhile, Chinese A-Shares companies have been making strides to improve profitability alongside better gauged capital expenditure; and deleveraging has proceeded hand-in-hand with improving free cashflows among nonfinancial businesses.
The Chinese consumer remains financially strong, with one of the globally highest household savings rates alongside signs of improving consumer confidence, which both combined should boost consumption contributing to overall growth.
Present developments from the “Value Up” programme should reinforce focus on shareholder returns including raising dividend payouts. And the A-Shares market is expected to benefit from a significant shift in asset holdings of households into stocks and funds, alongside growth in flows to the stock market from private pension schemes. Meanwhile, ongoing changes to accounting standards affecting insurers are set to increase their allocations to dividend paying stocks.
Tata Asset Management
For many Europe based allocators, the recent past has seen increasing interest in Asia’s other giant India.
Chandraprakash Padiyar, Fund Manager of the Tata India Equity Fund, brought 23 years of local research and management experience through a remote update for delegates on opportunities in India.
This began with mention of the market liberalization policy started in 1991, which laid the foundation for moving away from a planned economy. Forwarding to the current macro trends, Padiyar described them as significant, pointing to continued growth in GDP as a share of the global economy amid estimates it will become the third largest economy by 2028.
Similarly, the Indian stock market valuation has continued to grow, with a total market capitalization value larger than those in five of the G7. Demographically, the country enjoys a young working age population and continues to urbanize.
"There is an inflexion point of growth," Padiyar noted, pointing to significant growth in startups and 'unicorns' – now just behind China and the US – amid continued expansion in areas such as higher value-added manufacturing – India is a net exporter of mobile phones – and increasing capital expenditure, again supported by government policy.
From an equity investor point of view, the country has companies that are offering strong growth in earnings per share, and the market is seeing increasing participation by domestic institutional investors.
Panel Discussion
Alison Shimada, James Salter and Luo Jing, tackled three main questions during this segment of the event:
- How is the GEM story different now compared to what has been heard and seen over the past decade
- Given the event theme of ‘Having faith in the future’, what might the future be around governance / ESG /stewardship in the markets discussed in the presentations?
- And with rates expectations shifting – particularly regarding the Fed and the importance of US rates to emerging markets – what were the panelists own expectations when rates might start to change?
Reflecting points outlined earlier in the individual presentations, the panel noted that many businesses in emerging markets are well poised to generate returns to investors on the basis of fundamentals in play – including the projected growth differential to developed markets, which may be boosted by the combination of monetary policy, governance improvements and implementation of AI.
On governance, the panelists pointed to both emerging (China, India) and developed (Japan) Asia continuing a pathway of improvements in governance, stewardship and aspects of ESG. Speed of adoption may vary, but policy is leading to catchup with practices in regions such as Europe – thus also increasingly meeting the requirements put forward by asset owners and fund buyers in Europe.
And while impossible to predict the exact timing of the first Fed rate cut, there was general agreement that cuts are coming and this will be supportive of EM.
On the audience questions around possible state intervention in sectors, Luo Jing noted, for example, that there had to an extent been a learning curve within the Chinese government regarding market reaction at the time, and that expectations going forward were that more notification of policy decisions affecting sectors was likely. That said, for global investors concerned there is also an argument that the price of Chinese stocks has already discounted such activity.
