While Asian equity markets are trading at their biggest discount to world markets in over a decade, there are big valuation discrepancies between and within markets and sectors. As active investors with a contrarian approach, this gives us scope to lean into areas of excessive pessimism, while avoiding frothy areas of the market.
Asian equity markets struggled for much of 2021, with exports growth slowing after a strong initial recovery from the pandemic and China-related concerns denting investor sentiment. The slow rollout of vaccination programmes in some countries has been a drag on the domestic economic recoveries, particularly as new Covid variants emerged.
Yet, conditions have started to normalise, and looking forward we find reasons to be optimistic, particularly given the wide discount that Asia currently trades at relative to world markets.
Source: Refinitiv, February 2022.
Valuation discrepancies between and within markets and sectors also remain wide (as can be seen in the chart below), with scope to lean into areas of excessive pessimism, while avoiding frothy areas of the market.
We are wary of investment narratives which rely on a cyclical recovery being extrapolated too far forward, as we saw with some of 2020’s Covid-beneficiaries and China.
Exuberance towards China has given way to disappointment and pessimism, and a much more favourable risk premium is now being offered to investors as we enter 2022. Meanwhile, South-East Asian markets have been relatively weak, which we feel underappreciates their re-opening potential.
Source: Refinitiv, MSCI data to 31 March 2022. Ranked by highest to lowest valuation gap vs 10y average.
With earnings having rebounded strongly in the initial phase of the pandemic recovery, it is reasonable to expect a more gradual uptrend from here. Supply chain disruption remains a feature of the post-Covid backdrop, with unmet demand likely to spill well into 2022. The services sector also has plenty of scope to recover as activity levels normalise.
On the other hand, inflationary pressures are likely to depress the operating margins of price takers and represent a headwind for downstream businesses. As markets digest these complexities and potential policy changes, there is plenty of opportunity for active stock pickers to capitalise on misunderstood, idiosyncratic opportunities.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
As a large portion of the strategy is invested in less developed countries, you should be prepared to accept significantly large fluctuations in value.
The strategy may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of a portfolio. The Manager, however, will ensure that the use of derivatives does not materially alter the overall risk profile of the strategy.
Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.
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Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.
