Covid-19 has redrawn the outlook for global markets in 2020 and beyond. But for veteran Asian equities portfolio manager Elizabeth Soon, the crisis today isn’t fundamentally different from other crises she has experienced in the past: volatility creates new opportunity.
Ms Soon, head of Asia ex Japan equities at PineBridge Investments and portfolio manager of the PineBridge Asia ex Japan Small Cap Equity Fund, uses a time-tested investment process that has helped to deliver attractive returns through various market cycles.
Here, Ms Soon shares her views on the outlook for Asian equities and why Asian small cap companies are well-positioned for future growth.
1. More than six months into the Covid-19 crisis, some parts of Asia, particularly China, are starting to recover, while others are still trying to contain outbreaks. Given these developments, what will the shape of the economic recovery in Asia be like?
Forecasting the shape of the recovery is difficult given the lack of earnings visibility in the near term. The strong run-up in markets in recent weeks point to the aggressive liquidity injection into the system and fiscal support by governments, which are expected to assist the path of recovery from the economic lockdown.
Yet, demand cannot improve until consumer confidence and spending return and capital expenditures ramp back up. This, in turn, is dependent on the evolution and containment of Covid-19 — consumer confidence will bounce back, but only when the public health threat eases. When that happens, we believe the swing in pent-up demand will be very strong.
We expect the recovery in the region to be uneven. As such, we are monitoring how various markets are recovering from lockdowns, the normalisation of supply chains, and any pickup in demand, including external demand as exporters have been hurt by the Covid-19 situation. We also continue to monitor global Covid-19 responses, including developments in the therapeutic and vaccine pipeline.
2. Where do you see opportunities in Asian equities? What risks should investors watch out for?
As with every volatility there is opportunity. We believe the recent selldown has been driven by excessive fear and that made valuations very undemanding. As with the financial crisis in 2008, this environment will allow companies with strong balance sheets to increase market share and acquire weak ones.
The important question to ask ourselves is not “When will the recovery happen?” but rather “Which companies that were expensive before look cheap now on value terms and are coming to us at prices close to where we would want to buy? Three years into the future, will these companies trade at today’s prices?”
For example, we had been on the lookout for a company that could benefit from cloud usage, and recently invested in a certain software design company that monetises the cloud platform on which engineers host and share design files. We had been watching the company for some time when its share price fell significantly in the first quarter of the year. We believe it was an opportune time to start accumulating such companies, which will benefit from the rise of industrial electronic applications, automobile data centres, Internet of things (IoT) and other advancements. We believe this company will gain market dominance and leadership through industry transformation1.
Risks come with prolonged social distancing. Companies’ balanced sheets are under stress and this puts further strain on the financial system. The low earnings visibility will also lead to a downgrade of earnings, making selectivity very important.
Over the long term, we are confident in the growth outlook of Asian equities. We expect our portfolio companies to benefit from opportunities driven by secular trends in Asia such as urbanisation, automation, environmental and energy imperatives, technological innovation and others.
3. How do you approach stock selection during this volatile period?
At PineBridge, we stick to a time-tested investment approach in bull or bear markets: We focus on companies — their fundamentals, valuations and management quality. We don’t look for companies that will benefit from the downturn, but rather those that will survive the downturn.
The 40 to 70 companies in our Asia small cap equity portfolio2, for example, are selected through a rigorous, benchmark-unconstrained investment process. Our high conviction is driven by valuation below market, undiscovered stocks, triggers that drive stocks that aren’t yet recognised by the market, and management strength that will deliver sustainable earnings over a long period of time. We believe this thorough research helps investors avoid the prospect of permanent loss of capital.
4. What are the advantages of active investing during market uncertainty?
Our investment philosophy focuses on finding those rare companies that can generate consistent returns in any environment — before others recognise their worth. We concentrate on alpha-rich areas of the market, where our active investment approach allows us to build portfolios with a high degree of conviction. In this case, we believe the large and under-researched Asia ex Japan small cap market offers significant long-term alpha opportunity.
As bottom-up investors, we conduct thorough research and gain deep knowledge of companies. This process is as much to uncover opportunities as it is to manage risks. Our investment team is on the ground in Asia, with access to company management to understand their businesses from the inside out. In addition to assessing company fundamentals, the team integrates environmental, social, and governance (ESG) considerations into the investment process to mitigate material non-financial risks. We also leverage the insights of our global investment teams, including our industry clusters, to inform risk control. The result of this process is a portfolio that we believe will be highly differentiated in terms of benchmark allocations and potentially in terms of returns too.
Having a long-term investment horizon also helps us avoid trading on short-term news and reduce volatility in the portfolio. That said, the portfolio undergoes regular monitoring for any changes in company fundamentals and can re-balanced as needed.
5. Why should investors consider Asian small caps over other segments of the market?
Small cap companies form a large segment of the Asian equity universe and they tend to be under-researched and under-owned, making the segment a fertile ground for mispriced opportunities over the long term. Small cap companies tend to be at the fastest growth stage of their life cycle too. These companies may be largely unfamiliar names for now, but a select group of them could become the next generation of blue-chip companies in Asia. Small cap companies can generally offer exposure to diverse sectors and trends, including automation, 5G and others. Currently, our holdings are overweight information technology and consumer staples. We think conditions today offer a unique opportunity to select high-quality companies in this segment. Company differentiation and selection through research will be key.
Notes and disclaimers:
1For illustrative purpose only. This is not intended to be a recommendation to buy or sell a security or an indication of the holdings of any portfolio or an indication of performance for the subject company/issuer. There can be no assurance that any security discussed herein will remain in the Fund at the time you receive this information.
2As of June 30, 2020.
All investments involve risk, including the loss of principal amount invested. Past performance is not indicative of future results. This material should not be relied upon as financial advice. Investors should seek professional advice, and read the prospectus and the product highlight sheets, available from PineBridge Investments Singapore Limited or any of its appointed distributors, for further details including risk factors, before investing into any fund. Any views expressed represent the opinion of the manager and are subject to change. We are not soliciting or recommending any action based on this material. In Singapore, this document is issued by PineBridge Investments Singapore Limited (Company Reg. No. 199602054E), licensed and regulated by the Monetary Authority of Singapore (MAS). This advertisement or publication has not been reviewed by the MAS. Investors should note that the website www.pinebridge.com and any other website (including any contents therein) referred to in this document have not been reviewed or endorsed by the MAS.
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