ASIAN INVESTMENT OPPORTUNITIES IN TUMULTUOUS TIMES

Although China’s economic growth is slowing and equity markets have experienced excruciating volatility, financial industry development and liberalization continue, spawning opportunities for foreign investors.

At this year’s Fund Forum Asia conference in Hong Kong, varied portfolio managers, strategists, and economists presented some of the investment trends, opportunities, and challenges they are observing in China and in Asia regionally.

Marios Maratheftis, Chief Economist at Standard Chartered Bank, sees supportive macroeconomic factors in China, particularly relative to other markets. He sees tighter financial conditions, weak consumer demand, and slowing CAPEX in the oil industry as hampering growth in the U.S. and elsewhere. In contrast, he is more positive on China as policies and the economic composition gravitate toward domestic consumption and the services industry.

David Carbon, Chief Economist, Economic & Currency Research at DBS Bank, said questions linger about China’s hard landing, which he believes occurred four years ago. He acknowledges risks in China, specifically its slowing population growth and aging demographic as being drags on GDP. For economic growth, the country needs working-age citizens, and as fewer people are born and many retire, growth is challenged. He remains positive on China, though, even as growth weakens. “The slowdown in China will continue,” he remarked, “It is not something to worry about.”

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He is particularly bullish on opportunities surrounding the Silk Road Economic Belt, a developmental plan that Chinese President Xi Jinping is championing. The framework aims to foster closer economic cooperation between China and Eurasia, deepening China’s soft power with other countries while spurring significant infrastructure investment.

A DBS report that Carbon authored described the plan as “a vast network of land, sea and air links that would connect north and south, east and west and most of the angles in-between. Imagine a Charlotte’s web of infrastructure laid over North and Southeast Asia, the Near East, Russia, Africa and Europe – linking trade, finance, transportation, tourism, student exchanges and whatever else might lie in its way.”  According to Carbon, this could boost growth in Asia for the next five decades.

Richard Tang, CEO of ICBC Credit Suisse, said renminbi investments are a lasting trend for foreign investors. Relative to other currencies, he sees “tremendous potential” for renminbi-denominated investments in assets or cash. And as China’s capital markets develop, more opportunities are available to invest in RMB-denominated securities.

Investec Asset Management CEO, Hendrik Du Toit, said, “[China’s] capital market is going to be a massive emerging market universe, even in the global universe, the world’s second-largest capital market.”

Regarding China and the region’s prospects, he said, “The fact that China had a bit of a slow down or some changes at the top, that really shouldn’t change the 50-year picture. The 50-year picture of the world, the economic center of gravity is going to be Asia…If you’re not going to find returns in Asia, you will find returns nowhere.”

Carbon also highlighted the economic growth in Asia that is occurring as the consumer base broadens: “Today, Asia is putting a new Germany on the map every three years…In terms of GDP, the U.S. and Asia are the same size, but Asia is growing three times faster.”

James Hay, Principal & Founder of Pangolin Investment Management, also sees consumer opportunities in ASEAN. He noted changing demand patterns as people move from rural subsistence ways of life and become urban consumers.

Hay said, “If you’re a girl in a paddy field and you’re out on a Sunday, there’s no point in buying lipstick and doing your nails and doing your hair because you can’t be bothered, you’re out there for 10 hours. But once you get a job in a city, that changes and people start spending more money.” He is particularly bullish on Malaysia, which he says, “Has been out of favor since 1998. And there are incredibly cheap companies there.”

Gerard Lee, CEO of Lion Global Investors, said Indonesia is the market with the most potential. He sees encouraging signs in the country’s leadership and its steps toward liberalizing access for foreign capital providers.

In contrast, he was less sanguine on Myanmar’s prospects today. Over decades, he thinks the country has “Huge potential because it’s a huge country, with lots of resources, and a huge population.” He emphasized timing with investing, however, and does not think now is the ideal time for many investors to enter the country.

Bill Stoops, Dragon Capital’s CIO, agreed: “It’s going to be a long hard slog to make money out of Myanmar in terms of private equity, not to mention listed stocks.”

He compared some of the challenges with Myanmar’s capital markets development to the early years of Vietnam’s, which he said illustrates that, “You don’t really have to be a first-mover in these countries to optimize your returns.”

From capital market and liquidity perspectives, Vietnam is more developed than Myanmar, but trails many other Asian nations. Stoops said, “Vietnam is still in its start up days, but it’s far enough along now to be interesting and to have obvious potential.”

Although investment volatility in Asia’s frontier and emerging markets is relatively high compared to developed countries, and country specific events can increase risks, inefficiencies and economic growth are creating investment opportunities.

Joshua Bateman, CFA, CAIA, is writing a book on China. He can be reached at @joshdbateman.

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