“Over the last few years, we’ve seen an emergence of local brands in Asia,” Horrocks said at a media event in Hong Kong today.
Consumers have been turning to local brands – domestic or from other Asian countries – because Asian companies better understand Asian consumers than Western companies do, according to Horrocks.
He named cosmetics as a classic example. Asian consumers prefer different styles of cosmetics than US or European consumers, and Asian companies meet this demand much better.
Smaller brands
In order to capture this shift to domestic brands, investors should look at Asia’s small- and mid-cap companies, Horrocks said.
One reason to avoid large caps is that their valuations have been “pushed beyond their fair value” by short-term tactical pivot to Asia among US and European investors.
“It has been going on for more than 12 months now,” he said.
Such money typically moves into passive investments such as ETFs, and through them, automatically flows into large cap companies – the biggest constituents of market indices – boosting their valuations.
The effect of it is “blind buying” by ETFs of the largest constituents in market indices, which leads to high valuations.
As investors develop more confidence in the region, they will likely look beyond the ETFs, to active strategies. “That means that mid- and small-cap companies are likely to see more flows,” Horrocks said.
Earnings support?
While the US and Europe have prioritised corporate profits growth, at the expense of workers and social stability, Asian governments’ did the opposite, he believes. Policies designed to boost wages of workers have resulted in stifling corporate profit growth in the region since 2010.
The situation has changed in the past year, with the earnings shooting up, but there’s much more room for growth, he said. Asia’s policymakers may now turn to earnings-supportive policies.
“[Asia] can go through a prolonged period of policymakers favouring corporate profits,” Horrocks said.
Inflationary pressure is not much of a concern in Asia, he added. In fact, many countries could use a bit more inflation.
But the biggest underlying difference between the regions, according to Horrocks, is its openness to the world, as epitomised by China’s Belt and Road Initiative. It has led to an acceleration of Southeast Asian economic growth and to a sense of “real optimism that is led primarily by the policies of Xi Jinping and the Chinese government”, he said.
Fixed income in Asia is a different story. There are fewer opportunities than equities, he said.
High spreads and high real interest rates made bonds attractive in the past, but both have since come down. Asian corporate bonds still offer some value relative to other regions or to Asian government bonds, as they are currently priced at their average historical levels.
“The real opportunity in Asian fixed income was probably two-three years ago.”
