Oct 07

Some Of The World’s Best Investors Are Putting Their Money In An Unexpected Place:

A curious group of markets – India, Indonesia, The Philippines and Vietnam – have been identified as the best investing opportunities by a group of leading Asia macro strategists, who think that Asia and the emerging markets will considerably outperform the developed world.

While everyone is focused on the US Presidential election, Real Vision TV recently brought together some Asian market experts, to explain why they have recently turned bullish on the region and why institutional money has been underweight the Asian markets for the past five years. A video compilation of the highlights is shown below:

It features some diverse views around the common theme that there are some good opportunities for investors to get in now ahead of the curve. One common theme in the conversations is that investment flows are set to take off in the region, sparked by positive demographic and infrastructure stories, alongside political reform for growth.

Underweight Emerging Market Positions Slam into Reverse

Asia hedge fund heavyweight Paul Krake, who worked for Goldman Sachs Asia and managed for Moore Capital and Caxton Associates, before setting up his own macro hedge fund and independent research ‘View from the Peak’, said that these underweight positions are now being reversed as a number of pension fund RFPs for large emerging market mandates are being seen all over the place.

Global Yield Grab – A Wonderful Trade

“What you’re seeing is an environment globally of a yield grab. And bringing that back to the Asian context, and emerging markets, in particular, what we’ve had– and it’s been a wonderful trade, is that people have been underweight EM for the last five years,” Krake said.

This is mostly based on the slowdown in China and the declining growth of real wages in the emerging world, he said which creates a lot of structural issues.

“But that said, in a world that needs yield in all its forms, I can give you a dozen reasons why emerging markets have massive problems over the next five years. But you can’t have a flattening of the risk curve and see Indonesia still sitting up– sitting up there. And what you’ve seen, particularly since the breaks at lows, but this has been a theme since January, is people are starting to try to scramble and bring back that five year underweight in emerging markets back to some form of benchmark neutrality.”

Rising Stars: India, Indonesia and Vietnam Hit the Heights on Powerful Demographic Story

Krake is particularly bullish on Indonesia and India, which he said both have very clear long term stories, based on demographics, banking penetration and governments reforming from a low base. Rather than the old secular growth story, he is looking more at the region as a risk-rally based on a rerating of that risk.

“The demographic arguments in themselves are very powerful,” Krake added. “Indonesia is always going to be a market that is more cyclical or more driven by the whims of global financial markets than more insular markets like India. But, again, how do we not own Indian banks structurally when there’s 3% to 5% credit card penetration rates. These sort of numbers. They’re going one way. The profitability of Indian banks is very different if they get back to– in terms of banking penetration, just some sort of emerging market median.”

Vietnam at Discount with Better Earnings Momentum

Asia expert Simon Ogus of DSGAsia was especially optimistic about the prospects for Vietnam, which he said was still trading at a discount to many of the Asean markets but with better earnings momentum, despite a good run in the past year.

“The real story is in Vietnam,” Ogus said. “I’m personally invested more through private equity there– it’s the one place where the labor laws, the infrastructure, to an extent, is encouraging relocation of activity from southern China or from industries where China is getting more expensive. Or international investors just want a hedge against their China exposure.

An Asian Dragon on Fire

“Intel’s biggest factory in the world is in Vietnam. Hyundai have got a massive factory there. They’re very much doing the Asian dragon route with a very well-educated workforce — communist countries screw a lot of things up, but they tend to get education right. You’ve got an educated, motivated workforce, great demographics. And I think that at the margin, monetary management, fiscal management is getting better. They’re cleaning up a bad loan problem. It’s not as fast as you would like, but there is some progress. It’s a place where I expect to see a multi-year Capex upswing, and there aren’t many places where you can say that.”

India is the Best Long Term Investment Out There

Christopher Wood, equity strategy at CLSA, is another leading Asian market authority and he felt that India was the best long term investment out there. “If you said to me I’ve got to invest in one Asian stock market this year or like today, I can’t sell it for the next five or 10 years, you know then definitely I would own India,” Wood said.

“The key thing in India is that the best companies, the best companies in the emerging market universe are Indian,” Wood said. “But they got very high ratings, huge foreign ownership. And foreigners are very reluctant to sell them. So stocks like HDFC Bank, or HDFC– they’re probably the darling of stocks. And they’ve just continued to perform.

Sorting out the Dysfunctional State Banks

“Seventy percent of the banking system is state-owned owned banks. But because the state-owned banks are so big, it’s a huge opportunity for the private sector banks to keep growing. So if I own one– you said to me you can only own one sector for the next 10 years, it would be the private sector banks. But it Modi sorts out these state-owned banks and turns them into less dysfunctional organizations run on commercial grounds, then you’re going to make more money in the next two years on the state-owned banks. Because the HDFC Bank’s trading at four times book always. And State Bank of India is always trading at discount to book.”

Ogus was also positive on India’s prospects on the back of Modi’s reforms clamping down on bureaucracy and eliminating corruption.

New Pipes, New Floorboards, but Keep the Facade

“Modi inherited a beautiful Victorian mansion from grandma where the pipes in the floorboards haven’t been changed for 100 years. And all he’s doing is he’s putting new pipes in, new floorboards. But you don’t want to take down the facade because unlike China, India has financial markets, capital markets, a legal system which, in theory, are fit for purpose. They’ve just got to be made to work properly,” Ogus said.

“And so it’s very much an anti-corruption drive. But where Xi Jinping’s is very much top down, and you’re really not sure what the ultimate motivation is for Xi Jinping, Modi is bottom up. And he’s now saying to the states, this is what I did in Gujarat when I was running it, which is India’s most successful state. You can compete. You can introduce your own labor laws and compete for investment. So again, like Vietnam, it’s a multiple-year Capex cycle in a market which, of course, is far, far more investable for foreigners, both in equities and increasingly in the bonds.”

The Best Time to Be in Asia is Now But People Just Aren’t Interested

Dr Jim Walker, Founder and Chief Economist of Asianomics, is a 25-year veteran of the Asian markets and he said conditions have never looked better in terms of a platform for growth and that’s a big statement with his reputation as a perma-bear. “This is one of the best times to, I think, ever have been in Asia. And it’s one of the times that people are least interested in being here,” he said. “The Mekong Delta is probably the fastest growing part of the global economy. Indonesia is doing just fine. The Philippines have had the fastest four year’s worth of growth in the last 40.”

For markets to buy and hold for the next two years India and Indonesia are his key plays. “The Philippines we like a lot. But it’s small. It’s already done a lot. But India, Indonesia, and if you can get any exposure to the Mekong Delta, you should be taking it,” Walker said.

Hold Your Nose in India and Buy the Index

“We think we’re going to head into another five-, 10-year upcycle in India. So capital goods companies and the early part of the cycle industrial companies should be exactly what you want to buy. How you get there is so difficult. I mean, there’s small cap funds and the like, but they’re diverse as well. So I think the fact is that you’ve really just got to hold your nose and buy the index. If you can buy the BSE 500 rather than the BSE 100 or the SENSEX. I would rather do that.”

As for the debt situation, Walker said that was especially interesting, because we keep hearing about how bad debt was in 2014 and 2015. “So we thought what we would do is go back to 1997, when we had the Asian crisis, and have a look at the debt position of countries at that time against their debt position now,” he said. “And what you find is that if you take debt as a percentage of foreign exchange reserves, about four countries in Asia, including all of the ones that ran into trouble, in 1997 had debt-to-reserves ratios of over 100%. Today, nobody”

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