Asian specialist Hugh Young of Aberdeen Asset Management tells Jody Clarke how to bet on the Asian consumer.
What is the most compelling investment in Asia right now?
There isn’t anything terribly compelling after the rise in markets. So we’re a little cautious on the whole. Currently, the cheapest things in Asia, in pure valuation terms, are Japanese small caps. You can find companies selling at 25p in the pound. But the trouble with Japan is that they have been cheap for ages and the management don’t seem to be determined to do anything about it. So it comes with a big caveat. Thus if you want to know what’s cheapest, that’s what it would be – things like Japanese property companies. But they come with high risk. If they were in America, they’d be taken over tomorrow. But Japan is not the US.
Are you a China sceptic?
Yes. Even before the markets went up and China looked a bit bubbly, we would have been more in the sceptics’ camp. Our process is all to do with identifying high-quality companies and – obviously – buying at the right prices.
From our point of view, there are a lot of companies in China who are new to the stockmarket. Most have been spun out of state organisations. We are still unsure as to whether they will look after all their shareholders, or just the government, which is still the controlling shareholder. We concentrate strongly on good-quality, honest, transparent companies. We reject a lot of politically connected companies because you eventually have to pay the piper. In Indonesia, for example, when everyone was buying into firms run by the Suharto family, we never touched them. So we feel a lot more comfortable playing China via Hong Kong. If you look at our positions, they are almost a mirror image of the benchmark. The benchmark has a big chunk in China and a small amount in Hong Kong, while we have a small amount in China and a large amount in Hong Kong.
Asian markets rose by more than 70% in 2009. Can investors still lock in higher returns by plumping for emerging markets?
Yes, providing they are careful. One of the problems you find where there is big growth is that people get distracted by headlines: “China growing by 10%, give us all your money.” So they give it to someone in China and that’s the last they see of it. The growth stories of the Chinas and Brazils are true, but you have to be cynical before parting with your money. Of course, that’s true whether you are in England or China, but people often do some very thoughtless things with their money.
[Asian] stocks are on 18-times this year’s earnings, so they are not dramatically overvalued. But there is a lot of good news in the price. On any decent time horizon, we’re still fine. There are great companies with great prospects. But I’m cautious. Maybe it’s to do with my age, but this year, who knows, the markets could easily be down 20% or 30%.
What’s the best way to play the rise of the Asian consumer?
A very simple suggestion is to go for a stock called Dairy Farm (Singapore: DFI; LSE: DFIB). Its management is in Hong Kong. It’s a retailer with Sainsbury’s-type operations, but it also has drug stores. It has quite a regional profile. It’s not cheap, but it’s a classic link into the domestic consumer.
When I first started looking at these markets, people thought ‘buy the Samsungs’, or whatever the stocks of the day were 20 years ago on the manufacturing side, because they were supplying developed markets. But from that comes the steady growth of consumers, local banks or supermarkets.
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