Investors Look To Emerging Asia For Returns

Emerging Asian markets have continued to rise in August, particularly China.  Investor sentiment towards emerging Asia has improved markedly since Brexit occurred in June.  This marks the first time since we formed Chinus Asset Management in 2008 that investor sentiment towards emerging Asia improved following a global macro crisis.  As the Wall Street Journal reported last month:

Emerging markets aren’t a haven—but they look like a compelling alternative to the bigger concerns that still lie in developed markets.  One month after the Brexit vote, and one week after the Turkish coup attempt, emerging markets show no signs of flagging. In fact, the surprise success story of the year appears to be gathering momentum…  What were headwinds for emerging-market investors are turning into tailwinds. 

Investors have pumped close to $13 billion into emerging-market stock funds over the past six weeks.

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As a result, emerging market valuations have been recovering from near record lows at the beginning of the year.  They are still substantially less expensive than developed country valuations.

In a world starved for returns, emerging Asia is one of the few regions with both rapid economic growth and attractive valuations. 

China: As the “Emerging Destination” chart in the Asius section above shows, investors continue to be wary of China even as they rush into other emerging markets.  We, on the other hand, have a contrarian view and are bullish on China.  Our outlook is based on several factors:

• Our managers in China have relatively high earnings growth forecasts for their portfolio companies for 2016 that have not yet shown up in the stock prices.  If their portfolio companies achieve 20-50% earnings growth, as our managers forecast, then stock prices will experience similar gains, assuming valuation multiples remain constant.
• Chinese market valuations are rebounding off of historic lows but still very attractive.  MSCI China (which primarily track Chinese companies listed in Hong Kong) trades at 11.2x while the CSI300 (Shanghai index) trades at 12.6x.  There is room for multiple expansion as valuations revert back to mean.  
• The Chinese government announced that the Shenzhen-HK Stock Connect program will begin in Q4.  Foreign investors will have access to 673 Shenzhen-listed companies with total market cap of $1.9 trillion.  Chinese investors will get access to an additional 120 small cap stocks listed in Hong Kong with total market cap of $227 billion.  When the Shanghai-HK Stock Connect program was initiated in late 2014, both onshore and offshore markets surged.  
• Access to Shenzhen stocks is one of the key remaining hurdles for A-share market inclusion in MSCI indexes.  Goldman Sachs estimates that China’s weight in MSCI indexes will increase substantially over the next two years as A-share market weighting increases.  Each 1% increase of the MSCI Emerging Market index represents $15 billion of inflows into A-shares.

India: Indian markets have recovered strongly since February, pushing up P/E ratios above 20x compared to 17x historical average.  However, the high multiples are less of a concern in India because corporate profits are forecast to grow strongly over the next several years.

Chinus Asset Management (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.

© 2016, Chinus Asset Management, LLC

The Case for Vietnam

A trip this month to Ho Chi Minh City showed just how rapidly Vietnam is progressing.  Chic restaurants and boutique hotels line the streets.  Young people crowd into internet cafes and coffee shops.  Foreigners, including South Korean industrialists, Swiss investment managers, French chefs and Australian backpackers clog the airports.  Vietnam is attracting attention for good reason.

This is especially true from an investment perspective.  Vietnam is one of the most promising frontier markets.  Although it is poorer, and its equity markets are smaller and less developed than many of its Asian cousins, Vietnam is catching up rapidly.  If it is able to do so, it will create substantial shareholder wealth in the decades ahead.  

Vietnam has several attractive macro characteristics that are contributing to rapid economic growth.

Large, young and educated population.  Vietnam has 94 million people, the third most populous ASEAN country after Indonesia and the Philippines.  The average age is under 30, and only 35% live in cities.  Even so, the literacy rate is above 95%.  Population dynamics should provide a large boost to economic growth as more people enter the workforce, and move to cities and take on more productive jobs.

Competitive labor costs.  The average Vietnamese worker earns less than $200 per month, less than half the cost of a Chinese worker and among the cheapest in Asia. As a result, Vietnam is experiencing a surge in foreign direct investment as manufacturers look for alternatives to China.

Rapid increase in per capita income and consumption. Vietnam is approaching the inflection point where income per person has shot up in other Asian countries (known as the S-curve for income growth).  This cycle typically leads to a surge in consumer spending as people can increasingly afford aspirational items.

These factors are contributing to forecasted economic growth of 6.7% in 2016, among the highest in the world.  

The Vietnam stock market, which was launched in 2000 with two stocks, now has almost 700 listed companies with total market capitalization of $61 billion. 

The government recently passed several critical reforms that should provide a large boost to the stock market.  These include:

• In September the government relaxed the 49% ownership limit for foreign investors to 100% for all companies except banks and a few strategically important sectors.  Previously, several companies had been at the 49% limit for several years, which was a major restraint on foreign participation.
• The government is aggressively selling off state owned enterprises by listing them. There were 222 IPO’s of SOE’s in 2015 and another 174 companies have been identified for listing.
• Increasing the level of corporate disclosures, which is one of the last hurdles necessary for MSCI to promote Vietnam from a “frontier” market to an “emerging” market.  Attaining emerging market status would open up its stock markets to a much larger pool of investors. 

Vietnam currently trades at a significant valuation discount to other Asian markets even though its companies generate a much higher return on equity and pay out one of the highest dividends. It is attractive on many fronts.

We believe that the best way to capitalize on the growth of Vietnam’s equity markets is to do so through locally based managers with deep knowledge of local markets and companies.  We specifically seek out managers that excel at identifying rapidly growing companies that are often overlooked or misunderstood by the market. 

Surprisingly for a frontier market, Vietnam has several fund management firms with long track records and large teams of analysts.  We look forward to adding one or more Vietnam managers to our portfolio. Although Vietnam is still in the early stages of development, we believe it is poised for take-off.

Chinus Asset Management (CHAM), a U.S. West Coast-based asset management firm, provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.

© 2016, Chinus Asset Management, LLC.

India Readies for More Dovish Fed and Bull Rally

India has been firing on all cylinders to lay the groundwork for invigorated, tangible domestic growth and to shore up its diplomatic currency globally.

Under Modi’s leadership over the past two years, India has (i) implemented a nationwide social security system and comprehensive bankruptcy code, (ii) overhauled a decades-old tax treaty network along the Mauritius-India and Singapore-India corridors, (iii) digitized its incorporation and e-governance platforms and (iv) streamlined approvals in more consolidated and transparent fashion.

Abroad, it has been aggressively negotiating alliances across Asia, and globally, to position itself as a national partner for manufacturing, consumption and investment. Its most recent diplomatic ambitions have included lobbying for recognition as a global strategic and defence partner of the US, and a push for inclusion in the NSG.

The progress has been demonstrable for investors. Private equity saw more exits, venture capital deals boomed, and distress players should soon reap the rewards of the government's focus on cleaning up the balance sheets of public sector banks.

Indian equities, however, haven’t yet reflected the tailwinds of these reforms, due to global macro conditions triggered by the U.S. tapering of its decade-long quantitative easing policy.

But, a few explosive kickers now lie in store for Indian equities:

One, the much anticipated uniform goods and services tax (GST) is now widely surmised to pass in the upper house of Parliament, where it has been blocked by opposition parties to date. Once passed, it should normalize national supply chains, payment processing and revenue collection on a scale never before experienced across India’s 29 states.

Second, RBI Governor Raghuram Rajan’s recent announcement that he will not seek a renewed term as chief of the Reserve Bank of India confirms India’s intention to appoint a more dovish Fed head who we can expect will pare back interest rates, a move that many domestic voices are pushing for in order to further propel India into the limelight as the world's fastest growing economy.

Third, this week, the Modi administration finally opened up FDI in sectors such as defense and pharma to majority foreign ownership, and relaxed local sourcing rules for single brand retail. These changes should jumpstart a backlog of stalled deals into action and further stimulate increased foreign direct investment into India.

A big importer of energy, India is wise to move quickly to ride its favorable momentum while the global price of crude oil remains low, as a continued rise in oil prices or spike in domestic inflation could slow its sprint. Those negative factors notwithstanding, one can expect corporate earnings in India to get a big boost in the medium term assuming these kickers pan out as intended.

The author, Asma Chandani, is Managing Director and General Counsel at Chinus Asset Management, a U.S. West Coast-based asset management firm that provides investors exposure to the alpha-generating growth in China, India, South Korea and Southeast Asia, by utilizing an active investment strategy and local managers in each region.