It’s a tough market for fundamentally driven, bottom-up stock pickers. Central banks’ monetary easing has pumped up valuations, while deflation is undermining earnings growth.
Hugh Young, who helped set up Aberdeen Asia’s business in 1992, is a veteran portfolio manager with a long-term perspective – he still holds some stocks from that inaugural year. He argues that patience wins out against fads, even in the technology sector.
FA: How do you look back on more than two decades of investing in Asian markets?
Hugh Young: In some senses the markets are very similar to 1992. We still have some of the same holdings we bought in 1992. We’ve seen businesses and fads come and go. We’ve seen markets boom and crash. I notice the fund management industry has become more professional. A lot more people think before they invest, rather than play momentum stories. But the region’s story is still the same: it’s got huge growth potential and lots of exciting things going on, but waiting to benefit from these in the long run is hard because ‘long term’ in Asia can mean…forever!
Market dynamics have changed, though, since the 2008 financial crisis. I’m thinking quantitative easing, for starters.
Yes, there are new players that didn’t exist in the markets 10 years ago. The central banks far outweigh normal players, and are having, I’d argue, awful effects on the world.
You are known as a value stock picker.
And it hasn’t been a value market. Well, we’ve been doing this for 30 years, analysing portfolios and relating value to quality and growth. We’re at the less sexy end of the markets. We shy instinctively from the Alibaba type of stocks.
You prefer to invest in companies with which you are familiar. How do you therefore handle technology companies?
I’m probably the world’s worst at tech stocks, but we have younger members of the team who are very much engaged. With tech you have to be careful, because these things can come and go: look at the Nokias and Blackberrys of this world. Companies may be rapidly changing an industry, but are they going to provide us with long-term sustainable earnings? In Asia, tech is more about manufacturing, which often means low-margin businesses. Apple makes a massive margin, but Hon Hai [Precision] doesn’t. We own TSMC but semiconductors can be a fraught area. We own positions in Samsung Electronics and Indian companies like Tata TCS and Infosys. We’re interested in Chinese internet companies but we’re uncomfortable with their offshore structures and their governance.
Are you worried about being too exposed to companies that may be old fogeys?
Are we quick enough to spot an important change? Disrupters can come into any business, but the disrupters don’t necessarily make money either. The consumer benefits, though, so the gains come back to the Unilevers and other more vanilla companies.
Relating value to growth: hasn’t been much growth around, has there?
No, not much. The last few years we’ve seen earnings per share in the aggregate fall to single digits. It looks like now they’re going to be in the low single digits. Things are pretty anaemic.
What’s your take on China’s controversial market intervention this summer?
I don’t fully understand why they allowed things to go so completely bullish on the way up. It was a classic bubble that we didn’t participate in. When it collapsed, the surprise was the panicky reaction from what hitherto was a very considered government. That is quite worrying for investors. If you suddenly find half the market closed by government fiat, you start to think it’s not a market at all.
How will that episode colour your future allocations to China A shares?
We have a dedicated A-share fund, but there are very few A shares we’ve fallen in love with. The China exposure among our regional portfolios is limited. Few companies are transparent enough for us – although some are learning fast. So we did put some money into China after the bubble burst.
Overall how has investing in Asian stocks changed? Has it improved?
Transparency, broadly, has gotten better and better across markets. Which is good. The quality of information from companies and the quality of what they’re doing have both improved. They are more focused and pay more attention to return on investment. The principles of good governance have sunk in more.
