At a recent Fund Selector Asia event, asset managers as well as fund selectors and wealth management professionals said their focus is shifting from the U.S. to European equities due to gradual recovery in the euro region.
Nearly one-third of the fund selectors who were polled during the event believed European markets looked attractive over the next one-year followed by China and emerging markets that were favoured equally, each receiving 25% of votes. World’s largest economy seemed attractive to only 16.7% of the respondents.
William Sharp, European mid and small-cap equity portfolio manager at Syz Asset Management said it will take a little longer for Europe to recover completely even as there is recovery in the region especially in Nordic, Germany, and the UK.
“We need global recovery along with recovery in emerging markets for euro zone to recover,” said Sharp, who is looking for inefficiencies to exploit in the small-and mid-cap space.
“If European equities are recovering this year, then mid-cap should have a good performance. Valuations are still about historic average. It is a bit tricky. Money is going into high growth companies, making it expensive. Small- and mid-caps have outperformed large-caps over the last 20 years.”
Jonathan Price, investment director-equities at Standard Life Investments said small-caps are one of the “underappreciated asset classes”.
While investing in this space, he advocated to have an investment process filter so as to focus on companies with faster growth potential, focussed businesses, greater innovation, dynamic management rather than playing on valuations.
“Valuation is secondary in terms of small-cap investing. Don’t be driven by valuation, don’t buy stocks that are cheap. Be cognizant of stock with expensive valuation. Look for sustainable growth, go for quality and management longevity rather than focussing on valuations,” Price said.
From a global universe of about 6000 small-cap companies, Standard Life sees most of the opportunities in the European and UK markets.
“I think it’s not easy to find good small-cap companies in Asia,” Price said.
Dividend investing
At a time when the macro-economic environment is normalising Kotaro Miyata, investment specialist at M&G Investments made a case for dividend investing strategy.
Miyata who manages the M&G Global Dividend Fund said: “Clearly, the market environment has changed and investors are asking is the dividend story over? We believe the dividend story is not over. Dividend investing is still a compelling strategy.”
Dividend strategies normally work well in a falling or weak market but do not fare that well in a rising market.
Miyata emphasized on a need to focus on dividend growth rather than dividend yield and finds such opportunities more prevalent in U.S. technology companies and Canadian stocks.
Highlighting his strategy, Miyata said, “If you look at our portfolio, it is skewed towards US, given the established nature of dividend culture. Asian and emerging market is small and the current exposure is just at 3%, which is at historic low. US exposure is at 40%, Canada 10%, (there is) nothing in Japan as dividend records are poor there.”
Though he sees limited scope in Asia and emerging markets presently, he sees “lot of opportunities” emerging in the region over the next decade.
Theme play in Asia
In another poll question, nearly 65% of fund selectors voted for China emerging as the world’s biggest economy in next 50 years with US (23.5%) coming next followed by India and European Union.
When investing in Asia, Paul Danes, investment director, Asia, Martin Currie advocated for taking a long-term view.
“When people look at the investment themes here in Asia, one of the drivers is always a combination of population growth and growth in the middle class,” he said referring to the rapid growth in middle class population in China and India, which could throw up a few investment opportunities.
He suggested using “extremely selective” strategy focussing on only “fundamentally sound” companies that could really benefit from growth in Asia and taking advantage of demographics.
Sunil Asnani, portfolio manager, Matthews Asia conveyed a similar thought process for investing in Indian markets with a horizon of at least of five years and looking for companies with pricing power to beat the inflation.
“Well-run entrepreneurial companies with pricing power are better equipped to deal with inflation that may re-emerge as the economy improves,” he stressed.
Richard Williams, co-head of Asia, Hermes Fund Managers said his firm sees many opportunities evolving in China, but showed concerns over limited access to investing in the local shares there.
“Market is opening up and qualified foreign institutional investor quota is obviously increasing all the time. This is possible one of the exciting spaces. The frustration is getting your own QFII or RQFII (RMB QFII),” said Williams who manages the Hermes BPK Greater China strategy.
“As the A-share market opens up more and more to offshore investors, that local edge dynamic is going to change,” he hoped.
According to him, over the last one-year, best opportunities have resided in small caps and new economy sectors – TMT (technology, media, telecom), environment, and healthcare.
