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Not so ‘sexy’ companies outperform in Asean

While the market is not dominated by tech leaders, investors can find growth opportunities in underpenetrated sectors, such as the consumer space.
SooHai Lim, Barings

As markets in Southeast Asia continue to have difficulty in containing Covid-19, equity markets in the region have underperformed, with the MSCI AC Asean Index returning nearly -20% on a year-to-date basis, versus the positive 10% performance of the broader MSCI AC Asia ex-Japan Index, according to data from FE Fundinfo.

“North Asian markets like China, Korea, Taiwan and Hong Kong have done a better job in containing the virus a lot faster,” SooHai Lim, head of Asia (ex-China) equities at Barings, explained in a recent interview.

“Unfortunately, for Southeast Asian economies, such as the Philippines and Indonesia, they have not yet been able to contain the infection.”

Lim, who manages the Barings Asia Growth Fund and the Asean Frontiers Fund, added that North Asia markets have more leaders in technology, which have largely benefited from the lockdown measures to contain the virus.

“Covid has become an accelerator in terms of the adoption of technology themes, such as cloud computing and e-commerce,” he said.

That said, despite the negative performance in Southeast Asia markets, Lim continues to be positive on the region, citing secular growth trends that should drive stock markets up when the virus is contained.

“Not the sexiest”

Although Southeast Asia may not have much of the tech leaders investors may find in North Asia, growth opportunities can still be found in the region.

“In terms of investment opportunities, the Asean is still underpenetrated in consumer goods and services. Income levels continue to go up, where a lot of the consumers can now afford some small luxuries in life,” Lim said.

“There are also interesting niche companies, not necessarily the sexiest ones, but are able to deliver outperformance,” he added.

One example is Malaysia-based medical glove manufacturer and supplier Hartalega, which is one of the top 10 holdings of the firm’s Asean fund.

The Barings Asean Frontiers Fund

Source: Fund factsheet. As of end-August 2020.

“Why do we like something like that? If you look at Southeast Asia, there is a lot of rubber trees produced in the region, which creates a competitive advantage in terms of manufacturing rubber gloves.

“We also believe that it is an industry that is able to grow steadily in the long-term, simply because as income levels go up, hygiene standards also improve, and more countries in the region are now starting to use more of these gloves,” he said.

Meanwhile, technology leaders are also starting to emerge in the region, Lim added, noting that the Asean fund’s top holding is Singapore-based Sea, which is “Asean’s answer to China’s Tencent and Alibaba”.

Sea is a global consumer internet company and is behind e-commerce platform Shopee, which is available in Malaysia, Philippines, Singapore, Thailand and Vietnam; online games developer Garena and digital payments and financial services provider Sea Money, according to the company’s website.

Lim also finds opportunities in the financial services sector, as bank penetration continues to be very low and demand for financial services products continues to rise.

The Barings Asean Frontiers Fund

Source: Fund factsheet. As of end-August 2020.


An inefficient market

Lim added that compared to North Asia, the Asean region is an inefficient market, which provides fund managers with more alpha opportunities.

“Asean is a smaller region than North Asia or the broader ex-Japan market, and there is less sell-side research dedicated to this region. So it is an excellent ground for stock picking.”

In terms of his stock-picking strategy, Lim looks at the five-year earnings outlook of companies and see whether they are discounted in the current share price. In total, the Asean portfolio has 49 holdings.

“We try to look at companies that are exposed to strong secular growth themes. The growth should be decent, but the share price should still give us an upside from there,” he said.

The Barings Asean Frontiers Fund versus its benchmark index (three-year cumulative performance)

Source: FE Fundinfo. In US dollars.

Part of the Mark Allen Group.