Janus Henderson: Active management key to driving returns in Asia

Improving macroeconomic conditions are always good for company performance and share prices. That has generally been the case across Asia as the global economy has improved. The increasingly positive outlook for China’s economy should provide an additional boost to companies across the region. Gillan and his team have been very positive on Asia since the start of the year; from a macro view they think Asian growth is likely to be higher than the rest of the world in 2018. 

While Asia Pacific ex Japan markets were down in US dollar terms in the first quarter of the year, they outperformed other major markets like the US, UK, Europe and Japan[1]. Furthermore, earnings per share (EPS) for the region rose by more than 20% last year, according to Bloomberg. Gillan expects further EPS growth of 10% or more in 2018[2].

‘Companies have played well to the global recovery led by the US and the European Union. The recovery in demand from China has come a little later,’ Gillan says.

Asian stocks have potential to strengthen further

According to Bloomberg, Asia Pacific ex-Japan equities posted strong performance last year, up almost 40% in 2017 in US dollar terms. Gillan believes the strong run can continue. A large portion of those returns was supported by earnings growth and Asian currency strength. Furthermore, the market structurally underperformed global and developed markets for the last four or five years. ‘The Asian equity re-rating is far from over,’ he says.

Global institutional inflows help bolster the case. Flows into Asia accelerated towards the end of 2017. Recent global volatility did little to undermine the positive sentiment. An influx of active money is also good news, thinks Gillan, as investors need to be selective.

China volatility remains a concern

Chinese tech stocks performed well at the beginning of the year, but in general some investors remain sceptical on China as market volatility is a constant concern. But, encouragingly, stimulus measures implemented by the Chinese authorities in 2016 have yielded positive results. Banks are tackling non-performing loans and supply side reforms.

‘This year we are seeing some of the value sectors, the beneficiaries of supply side reform and then the banks, starting to do well,’ he says. However, further reform may end up being risky. If the Chinese government steps up efforts to deleverage the economy, it may impact market sentiment.

India can do better

Reforms in India have also been under the spotlight. The economy is more domestically-focused, but there were significant implications for quoted companies from the demonetisation of 2016 and the introduction of the general sales tax. Corporate earnings fell short of expectations as a result.

Strong recovery in Korea

Elsewhere, North Asia has posted strong export recovery figures. South Korean cyclicals had a strong 2017. A pickup in global demand, allied with limited supply growth, has been good for Korean firms that produce memory chips for computers, smartphones and a growing list of connected devices.

Sector positioning

In his view, many tech stocks are now close to being fully valued, accentuating the need for selective stock picking. Gillan has lowered tech exposure as a result. Instead, his team has actively increased exposure to Asian financials as the region’s economies have improved. ‘The market assumption was that banks would benefit from rising US interest rates, but there has been a lag. Singapore bank shares have moved ahead of their earnings improvement but we still see improving return-on-equity and expect better margins to continue,’ says Gillan.

The consumer sector picture is also more nuanced, with a significant disparity in valuations across the region. It is not uncommon to see large Indian consumer stocks on 40x earnings, but Chinese consumer names have underperformed in recent years, opening up pockets of value opportunities. There are plenty of other selective stories to follow, for example, Taiwanese food staple companies are seeing increased demand from China for noodles and beverages.

Underweight Australia

Australia remains an underweight. Banking stocks dominate the market and are under pressure from the wide-ranging Royal Commission, which may put downward pressure on returns. ‘We think Australian banks will struggle to maintain their high returns. It was an easy decision to underweight,’ admits Gillan.

Value in Southeast Asia

In Southeast Asia, the team also sees more opportunities. These markets have been somewhat marginalised by exchange-traded fund (ETF) money targeting the larger index countries and Andrew has identified some value in some of the smaller markets.  ‘We have added to Malaysia as oil prices have recovered and forthcoming elections should be good for the domestic market,’ he says.

The Philippines remain a firm favourite as well. From a top-down perspective, the economy may appear to be overheating. Even so, the belief is that the well-run large conglomerates are diverse enough to ride out any hiccups. ‘Large index stocks were disproportionate outperformers last year,’ says Gillan.

He also says that because many Asian firms are family-run, active managers have the advantage of being able to monitor corporate governance levels to ensure shareholders obtain the best returns. Overall, ‘it is becoming increasingly important to be an active investor in Asia,’ Gillan concludes.

1 Source: Thomson Reuters Datastream, total returns 3 months to 31 March 2018. Past performance is not an indicator of future performance.

2Team views and forecasts may vary and are not guaranteed.