Sundeep Bihani, Eastspring Investments
Value investors might benefit from a multi-year opportunity in Asia in line with strategic shifts towards decarbonisation and dual supply chains, as well as in an environment of inflation and rising cost of capital.
Such market trends are starting to revert investors’ focus back on corporate profits and cashflows, according to Sundeep Bihani, portfolio manager at Eastspring.
He points to the strong rebound for value equities in Asia ex-Japan since November 2020. “We believe this re-commencement of value’s outperformance has just begun in Asia, well supported by the economic cycle, implied market expectations and investor positioning.”
Added Bihani: “As the pendulum starts its mean reversion journey from one end (optimism over growth stocks) to the other end (renewed focus on profits and cashflows), we see significant mispriced stock opportunities for bottom-up value investors in Asia.”
A new path to value
In comparison with the previous decade of asset light growth, Asian companies are seeing new outcomes in their investing and operating behaviours due to the combination of global decarbonisation, the focus on sustainable growth and the shift to dual supply chains. This environment also bodes well for Asia-based suppliers to global businesses.
According to Bihani, the beneficiaries are likely to be cyclical, old economy and financial stocks.
Banks worldwide are set for gains amid opportunities to grow earnings after years of low margins (in developed economies) and poor asset quality (in emerging economies), based on the strategic shift among companies combined with higher interest rates and higher inflation.
Across Asia, robust Asean banks are expected to further benefit from what Bihani describes as “asset quality normalization” coming out of the delayed reopening in their economies over 2021. “Market implied returns and investor underweight positioning suggest we are getting paid to take on this normalisation, without running into investor crowding.”
Other value-buying will emerge from several restructuring opportunities in Asia where management teams are driving large-scale change in a firm’s culture, operations and balance sheet to revert returns to their historical mean.
“We believe our understanding of this internal change and an edge in understanding normalised returns beyond the next few quarters allow us to take outsized positions in these companies, without worrying about short-term macro volatility,” said Bihani.
Eastspring has also identified mispricing opportunities in large public-sector companies in China. These are because many of them have been de-rating over the last two years due to the US sanctions, the property downcycle and the trade war concerns – yet, there has been no negative impact to their medium-term cashflows.
“As we look beyond the recent Covid-induced lockdowns, we are also attracted to the services sector (travel, leisure and advertising),” added Bihani. “These businesses have robust moats and positive cashflows and are outside the limelight of their crowded bigger peers.”
Renewed faith in value
These trends have the potential to appeal to some investors who had, philosophically, given up on value investing followed sharp under-performance over the prior decade.
It should also reverse the risk-aversion shown by some investors who might have been unwilling to look beyond the next quarter and shift out of yesteryear’s winners.
“The market, having enjoyed years of growth investing, is not yet reflecting any of this potential regime shift,” Bihani said. “This is reflected in the extreme valuation dispersion between value and growth and quality stocks, and the continuing overweight positioning in growth sectors as reflected in sell-side surveys.”