This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks for the chance of fantastic rewards from across the region.
Emma Wall: Hello and welcome to the Morningstar series, 'Why Should I Invest With You'. I'm Emma Wall, and I'm joined today by Paul Danes, Portfolio Manager for Martin Currie. Hi, Paul.
Paul Danes: Hi, Emma.
Wall: So we're here today to talk about the perhaps slightly lesser known parts of Asia, many U.K. investors I think have written off investing in the region because they are scared by China, but there are of course other stock markets in Asia, aren't there?
Danes: Of course there are. And I think it's interesting to note that whilst China is slowing down and that is creating some problems for others parts of Asia, so for example ASEAN markets have definitely quite scared at the moment about what's going to happen to their exchange rates. But the long-term growth story remains pretty unchanged as it has done for the last 10 years.
But what you are getting different today is valuations have fallen really quite dramatically because of what's going on in China and because of course the fear about Fed rate rises, and therefore, I think the opportunities that are starting to appear in some of these markets are better than have been for at least three or four years.
Wall: So to that end, I suppose it's a fantastic opportunity for stock pickers, for active fund managers?
Danes: Yeah. I guess one of the interesting points actually is the valuations are not all coming down equally. It depends very much on the sector and on individual companies, and where you are getting people really quite afraid and you've had earnings disappointments, that actually creates for us quite an exciting time, because the expectation now is much lower from some of these areas than it was again three or four years ago.
And to give you examples again, financials for example, obviously everyone knows that we're going to go through a credit cycle in Asia and particularly in those more developing parts of Asia, and yet, the valuations are already reflecting a really bad scenario and our experience talking to managements, is that whilst there is a credit cycle going on, it's nothing like it was in for example 1997 when there was a real collapse in Asia.
Wall: Are there any particular country stars, than putting China aside. I know that you are stock pickers, but is there – are there any… like the ASEAN nations for example?
Danes: Well, the difficulty there is, not surprising markets tend to be very good at discounting these things. So the clear star from an economic point of view is the Philippines, and that's partly because it's continuing to grow very strong and partly because the foreign exchange risk there is much less mainly to do with remittance of money from overseas. However, that is the most expensive stock market in ASEAN right now, where I think you're getting some interest is somewhere like Indonesia for example, somewhere like Malaysia where expectation have come down a very long way.
We've talked earlier little bit about the FX risk which remained very significant, but both those currencies have already fallen 20% to 30%. So you start feeling that maybe some of that's already discounted and in those markets, I think there are some really good opportunities.
Wall: I mean we started the video by saying that China is not the only market in Asia, and so there are other opportunities other than China. But that's not to say there are no opportunities in China either. I mean it may be slowing down, but they are still looking at a growth that we'd pray for in the West.
Danes: Yes. Well, I think there is a couple of interesting things about what's going on in China. The first one is, there is obviously two schools of thought with regard to China, one is that, there is going to be a hard landing and one is, the government have enough policy tools to fix the problem. I think we're probably more in the latter camp. I think if there had been a hard landing you'd have seen it back in 2009/10, because now you've had an adjustment taking place for a number of years already. So, with that background, we don't think there is collapse coming in China, and so there are opportunities.
Actually one of the interesting markets for me is Hong Kong, because Hong Kong is being hit very hard because it does have a lot of directly Chinese-facing businesses and such like. But Hong Kong market as a whole also has lots of Asia-facing businesses. So, there's lots of businesses which are genuinely Asia-wide, listed in Hong Kong, but valuations have come down purely because of what's going on in China. So that for me is a really important interesting place to invest today.
Wall: Paul, thank you very much.
Danes: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
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