Editor’s note: Conventional wisdom holds that
markets in the Asia-Pacific region are destined to follow China’s economic
path, for better or (lately) for worse.
However, as explained by Decker &
Co. founder Mark Decker in this contributed article, the poor sentiment about
the area is not consistent with what’s happening on the ground there.
Sentiment
will shift and assets will return, he predicts, benefiting those investors who
are positioned correctly ahead of time.
The slowdown
of interest in Asian EM markets is unlike anything I’ve seen since I first
landed in Asia in the mid-1990s. But companies in ASEAN aren’t standing still.
Sentiment will catch up to what’s actually happening on the ground once retail
investors get past their vague fears about China, Brexit fallout, U.S. interest
rates, and other factors. Now is the time for investors to be researching and
getting ready for the time when sentiment shifts and assets start to flow back
into these markets.
Investor
cash levels were at five-year highs in June, and many global funds are
underweight Southeast Asia. Furthermore, research coverage is low and the level
of analyst sell recommendations suggests investor capitulation is either here
now or coming soon.
Below is
a chart beginning in January 2006 showing how analyst sell ratings for the top
25 names in ASEAN have compared to performance of the MSCI Asia ex-Japan Index.
In the chart, when the red line is moving down, there are increasing numbers of
sell ratings. The blue brackets highlight periods in which analyst sentiment is
worsening while the index is moving up
Red
sentiment line overlaid on MSCI Asia Ex-Japan Index performance:
So
2016-to-date reflects worsening sentiment – to the levels of 2013 and 2009. Yet
ASEAN country indexes are at or near their 2016 highs right now.
Global
funds are having a difficult time raising and holding onto money for their Asia
portfolios. What’s more, there’s been an exodus of talented people from the
Asia-focused capital markets industry. That was reinforced for me at the Milken
Conference this spring, where everyone on both the buy and sell side was
moaning about the same thing. This tells me that those who can make it through
this industry shakedown will prosper.
There are
a lot of negative things happening in the world that are absorbing investors’
attention—and, probably, for other Asian markets to bounce back strongly
requires a sorting out in China because it continues to be the focus of the
financial media and therefore the investing public.
But
companies in Southeast Asia aren’t standing still. Neither is progress toward
regional trade agreements, which we expect to support a coming ASEAN export
boom. The Trans-Pacific Partnership (TPP), currently the subject of political
rancor in the U.S., is part of a trend toward closer trade integration that’s
going to continue because the economic advantages are just too great. The
Regional Comprehensive Economic Partnership (RCEP) also reflects this trend.
Increased investment from companies in China, the U.S., Japan, Taiwan and
elsewhere are leading to rapid development of production and supply chains
among the TPP member countries.
We see
the elimination and lowering of trade barriers accelerating economic growth,
driving global income gains, improving welfare, and promoting sustainable development
across emerging and frontier Asia. The effects on Vietnam will be
transformative. Vietnam is the only ASEAN member and initial party to the TPP
that is both at the center of the U.S.’s strategic “pivot” to Asia and
development of the Greater Mekong Sub-Region (GMS). The rest of ASEAN will not
be far behind. Key industries likely to benefit include fisheries, ports,
logistics, and manufacturing.
Furthermore,
decoupling from China is already happening. Exports from ASEAN countries to
China—which have grown from nothing to a substantial share—are still much lower
than ASEAN exports to the U.S., Europe, and other developed markets.
And the
investment results, even in the face of such extreme negative market sentiment,
speak for themselves. That’s true both regarding YTD highs or near-highs in
most ASEAN country indexes as well as things happening under the radar. In our
business, for example, we focus on under-covered ASEAN names, usually >$1
billion market cap, and are seeing substantial interest in private placements
of publicly listed shares with global funds such as U.S.-based mutual funds.
The
relaxation of U.S. regulations around private placement (144A) deals is making
a difference versus 10-12 years ago when Asian companies with deals under $250
million stopped coming to the U.S. because they could get their capital needs
met more simply and efficiently in Hong Kong and Singapore. Now, there’s no
question that regulatory moves in the U.S. will increase the flow of smaller
deals coming to the U.S.
This will
be a boon to Asian issuers. And management teams in ASEAN are seeing what’s
happening and expressing increased interest in getting deals done with U.S.
investors. We see family-controlled businesses, for example, that want to sell
a stake but would much rather sell to a U.S. fund than to local retail
investors in their market.
Regarding
Brexit, it’s too soon to know the effects on Asia, but I am not concerned that
rising nationalism in the West is going to derail the opening and growth within
the Asian region. In fact, it’s conceivable that the Brexit troubles in Europe
will accelerate Asia on a path toward financial leadership. Vested interests
are getting dislodged, and that means new spheres of opportunity.
As I
mentioned, it will probably take more clarity about China for sentiment about
ASEAN to really take off. China’s been in the midst of a soft landing for the
last three years. Recent data out of China shows non-performing loans at
1.5-2%. Fund managers say closer to 20%. This is just speculation, but I
suspect that some big investors are lining up preparing to offer their services
for some kind of workout plan. That reason for expressed interest makes sense
as China isn’t even close to working off bad loans. Maybe six months from now
it will be clearer. Or maybe it will take 24 months.
But while
the timing isn’t clear, the direction is: the poor sentiment about ASEAN is not
consistent with what’s happening on the ground. Sentiment will shift and assets
will return. It takes time to do the research and prepare to deploy capital
across such a diverse opportunity set. Now is the time to get ready.
Mark
Decker
Mark Decker is founder and CEO of institutional
equities broker Decker & Co., with offices in the U.S. and Asia.
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