Looking east for opportunities
Key markets in Asia offer growth potential, writes
Faced with an increasingly complex and largely unprecedented global risk landscape, South African investors investing offshore will need considered allocations across assets, sectors and geographies to protect their capital while still realising returns.
Iain Cunningham, co-head of multi-asset growth at Ninety One, highlights key markets in Asia as potential growth opportunities.
“The politburo — the principal policymaking committee of the Chinese Communist Party — has called for ‘significantly boosting market confidence’, ‘forceful monetary policy’ and ‘reinforcing fiscal policy’,” says Cunningham.
“This doubling down on policy, coupled with a rapid unlocking of the economy after the country abandoned its zero-Covid policies, and considerable pent-up household demand, should drive a robust recovery in economic growth and corporate earnings.”
Depressed equity valuations in Asia are also influencing asset allocations, adds Cunningham.
“We continued to accumulate equity positions in China and Hong Kong to take advantage of depressed equity valuations through the second half of 2022, and our portfolios remain biased towards or overweight the region as a result of these dynamics.”
John Christy, a member of the team of investment counsellors at Orbis, Allan
Gray’s offshore investment partner, highlights additional opportunities in the Asian market when adopting a stock-picking investment strategy.
“History suggests that stock picking based on a review of company valuations can make an enormous difference when equity markets are generally weak. Investors should have at least a fighting chance to outperform broader stock markets if they can consistently buy shares in businesses for much less than they are worth.”
According to Christy, Japan offers an instructive example in this regard. While the region has returned just 3.9% per year to passive investors since 1998, it has been a rich hunting ground for contrarian stock pickers.
“Since 1998, our Japan Equity Strategy has delivered roughly double the annualised returns of the local benchmark, and higher returns than the world index,” says Christy.
And Orbis remains confident about the region in the face of lacklustre equity returns elsewhere.
“Based on extensive research in 2022, two clear themes emerged in our preference for value shares.
The first relates to businesses that provide critical energy, infrastructure and materials. The second and more recent theme relates to banks outside the US. In this regard, we added two significant new holdings in Japan, namely Mitsubishi UFJ Financial Group and Resona Holdings.”
As a result, stock selections in energy, banks and other value-orientated holdings now account for about 70% of the Orbis Global Equity portfolio.
Andriette Theron, head of research at PPS Investments, affirms the trend towards value stocks, with the shift away from higher-valued growth companies gathering pace in 2022.
“Portfolio managers are becoming even more selective about higher-growth companies and continue to favour firms with potentially more durable and visible earnings,” she says.
The PPS Global Equity Fund, which incorporates the Capital Group New Perspective strategy, has reduced exposure to e-commerce and payment platforms, semiconductor manufacturers and internet-based media and entertainment companies.
“We favour large-cap pharmaceutical companies, especially those with strong franchises, resilient earnings and healthy balance sheets. Exposure to the health-care sector has increased substantially and is now at a record high,” says Theron.
Other key components in the portfolio are energy and materials-related companies, including direct beneficiaries of favourable long-term supply-demand characteristics that form part of the solution to decarbonise the global economy.
“These include mining companies extracting the metals required to electrify the global economy, and selected oil and gas companies transitioning to more renewable power generation.
“We also see opportunities in the industrials sector from companies that leverage secular growth trends by providing solutions that help increase the energy efficiency of buildings and infrastructure, such as construction and heating, ventilation and airconditioning equipment.”
Outside equities, Cunningham highlights attractive opportunities in high-grade government bonds in developed markets.
“In US treasuries and other select developed market government bonds, real interest rates are at 12-year highs. In particular, we see the best opportunities in highgrade government bonds in countries where housing markets and households are already feeling the effects of current hiking cycles.”
From a currency perspective, Ninety One remains defensive but more diversified than last year, with a long position on the US dollar, Swiss franc and Japanese yen vs the Swedish krona, Canadian dollar, Australian dollar and New Zealand dollar.