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ASI buying Apac quality stocks

As markets undergo wild swings, there are opportunities in companies with solid balance sheets and structural growth models at depressed valuations, according to Aberdeen Standard Investments.
Pruksa Iamthongthong, Aberdeen Standard Investments

ASI’s focus on identifying high quality companies has been consistent over the past three decades, and has not been modified since the merger between Aberdeen and Standard Life in 2017, according to Pruksa Iamthongthong, senior investment director, Asian equities at Aberdeen Standard Investments (ASI).

“Therefore, we have taken advantage of the recent sell-off in Asia-Pacific equities through discerning buying of stocks of companies which are market leaders in their sectors and whose structural long-term growth prospects remain intact,” she told FSA.

“Furthermore, equity valuations have fallen since the start of the year, with the price-to-book ratio of Asia-Pacific equities more than one standard deviation below its historical average,” she said.

Iamthongthong is a co-manager of several Asia-Pacific equity products, including the $1.95bn Aberdeen Standard Sicav I Asia Pacific Equity Fund.

Of course, the fund has struggled, along with the rest of its sector during the past month, which has affected its longer-term performance.

However, its three-year cumulative return of -6.39% is less of a decline than the -7.47% average performance of the 112 Asia-Pacific ex-Japan equity funds available to Hong Kong and Singapore retail investors, according to FE Fundinfo data.

The fund has generated alpha of 1.76 and has 0.49 information ratio during the same period, and its annualised volatility of 15.13% is lower than the peer fund average (14.78%).

China weightings up

ASI has a bottom-up stock selection process, with analysts taking “ownership” of individual stocks and sectors. Their recommendations are assessed by portfolio construction teams for country and pan-regional funds who make the final selections.

The managers have added some China stocks, such as Tencent, whose emphasis on We Chat connectivity, payments and advertising revenues four years ago created a more sustainable business model, while its traditional gaming and mobile entertainment divisions should benefit from the current home-bound environment, according to Iamthongthong.

In fact, Asia-Pacific equity funds with high weightings to China have tended to hold up better this year than funds with out-sized exposure to sub-regions such as Southeast Asia, according to FE Fundinfo data.

ASI has also bought more China A-shares in the technology and consumer discretionary sectors, and has increased allocations to fund favorites such as Samsung Electronics and Taiwan Semiconductors Manufacturing.

“Technology stocks, in particular, sold off indiscriminately last year as investors panicked about the consequences of the US-China trade war, and the current coronavirus-induced market crisis has also depressed prices,” said Iamthongthong

“Although volatility is likely to persist for the next three-to-six months, owning ‘quality’ stocks in the portfolio is the best way to mitigate risk,” she said

Iamthongthong defines these as market leaders which are on track for long-term structural growth.

Key indicators include management consistency, adhering to its strategy and maintaining strong corporate governance even during bad times, market positioning to take advantage of and lead trends, and solid balance sheets with plenty of cash flow to enable them to invest for expansion or withstand any difficulties in accessing credit.

“It is essential to assess credit risk and growth risk carefully,” said Iamthongthong.

“In the first instance, this involves a diligent analysis of a company’s balance sheet and cash flow position so it can cope with any constraints in the credit markets.

“For determining growth risk, we need to establish whether a company’s long-term strategy and prospects are still viable and committed. If so, then we can on a stock-by-stock basis feel confident about adding exposure,” she said.

Asia’s resilience and risk

She believes the macro outlook for the region and the ability of its policy makers to respond to the economic impact of the Covid-19 pandemic is encouraging.

“The recent sharp fall in oil prices should translate into lower inflation, allowing central banks to cut interest rates to stimulate their economies.”

However, although the region is “relatively better off”, it is unlikely that China and Asia in general could be insulated from a prolonged US and European recession, she agreed.

Also, there are significant differences in the capabilities of countries within the region to cope with the the spread of the virus.

“China has been effective in containing the virus and seems to be on the path of recovery, and smaller countries such as Singapore have been resilient.

“But, it might be much harder India and Indonesia, with much larger populations, to manage the outbreak, and the economic consequences could be more severe,” she said.

Aberdeen Standard Sicav I Asia Pacific Fund vs sector average and benchmark MSCI AC Asia Pacific ex Japan index

Source: FE Fundinfo. Three-year cumulative returns in US dollars.

Part of the Mark Allen Group.