What is Driving the Asia Stock Market Rally?

Joshua Crabb, Old Mutual Global Investors Head of Asia Equities, gives his three themes for outperformance in Asian equities

Emma Wall 27 March, 2017 | 8:00AM
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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall, and I'm joined today by Joshua Crabb, Old Mutual Global Investors Head of Asia Equities, to give his three themes for outperformance in Asian equities.

Hi, Joshua.

Joshua Crabb: Good morning, Emma.

Wall: So, what's the first theme today?

Crabb: I think the first one for me, it really sits around, what I'll call, the sort of value that we see in the market and the inflection point. We think people very underweight Asia and we think that is going to be a great opportunity. We've seen a lot of investors who've been looking, very few people have taken advantage, because Asia has been underperforming for almost six years until the last year. People are really focused on independent growth companies, high-quality companies, and the valuation range of these companies is now at a very, very high level.

Now, when we look at sort of certain areas, whether that's industrials, financials, et cetera, we are seeing a great value opportunity there. So, firstly, Asia much cheaper than the U.S. Secondly, things are starting to improve, but not in the areas where people currently own.

Wall: So, it's about being a stock picker?

Crabb: Well, this is where we are seeing the dispersion starting to pick up, which is very interesting. People are going around saying is these events occurring, but what we've really seen, and this is a global phenomenon, is stock dispersions being at the highest level since we've seen in 2009, and we often see this around inflection points.

So, absolutely, this is a great time. It's not about focusing on individual sectors or countries, it's really about digging in and understanding what is going on with the companies.

Wall: And what's your second theme today?

Crabb: Okay. So the second one from me at the moment is what people are starting to turn, the reflation theme. Now, if we look at financials, if we go back six months ago, everyone hated materials and oil, and today they've done quite well. And if we think about sectors that people still hate, maybe outside the U.S., it's still financials.

Now, when we look at Asia, these are big sectors. They are very, very cheap, and they are very, very under-owned. Some of the analysis are showing people are about 3% underweight Chinese banks, for example, which is quite significant.

Now, this is being caused for a number of reasons. One, we've seen loan growth decline around the world. Secondly, we've seen high regulation of fines. Finally, we've seen the yield curve flatten out and also drop, which is bad for bank earnings. Now, when we look at that today, we think that some of these are starting to change. We think the regulatory headwinds are at least slowing and potentially going into reverse if we see what is happening in the U.S.

We're seeing that the curve is starting to steepen and the base rate level is starting to pick up. Now, obviously in places like Asia, there are still pockets where we will see good loan growth because we haven't had that massive penetration. So, this we see is a very good opportunity as well.

Wall: And what's the third and final theme?

Crabb: Absolutely. So, to pick one that's a bit different. India is a very popular market with many people. And we tend to have a little bit contrarian views around what we'll call inflection points in markets. But we are also quite positive on India, but what we own is very different. So, if we look what most people own in India, they tend to own export companies, pharmaceuticals, IT services, et cetera, and that's because these have done quite well.

But if we roll that back and say, what's positive about India, why do people like it, and they like it because it has grown very, very slowly relative to what it should, and people know at some point there is going to be a catch up.

Now, part of that’s being because you've had multiple parties forming government that haven't done anything for many, many years. Now, with the BJP having a strong position and even last week taking the UP election, which was a bit unexpected, has reinforced that. Now, what that's going to mean is India is going to do what China did before, Korea, Taiwan, Japan, and the U.S. They are going to take people that are under huge loss on farms and bring them into the manufacturing sector.

To do that, India needs roads and rail and power plants and all these types of issues. Most of these companies have been trading at fractions of book value. They had had very little revenues coming the door that had to stuff with high interest rates and no one owing them. These are the areas that are going to really, really succeed and not the ones that people own. So, India looks ostensibly as an expensive market, but these assets are still very, very cheap.

The other aspect of this that I find quite interesting is, if you look at IT and pharmaceutical companies, these are probably the ones that are the most at risk from potential trade actions out of the U.S. yet their high valuations and high ownership levels is quite a concern for us.

Wall: Joshua, thank you very much.

Crabb: My pleasure.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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