12th April 2016
Asia's long, slow turn around
“Asia is going through a long, slow turn around,” begins Matthew. “I think the export environment will remain quite tough. There is very little pricing power locally and the region is creeping into a deflationary environment.
“As ever with Asia though, there are micro pockets of opportunity – where weak and poorly governed companies are going bankrupt and good companies are taking the market share. So we do actually have about 25% of the fund in exporters that are these type of 'winners'.”
China is still a cloud on the horizon
“I think the doom and gloom has been overdone but there are still many red flags,” continued Matthew. “Cement capacity and usage predictions, for example, are off the charts, which is an unrealistic estimation of where demand is.
“And I am still staying well away from Chinese banks, despite the serious discount brought about by the market rout at the start of the year. They have too many structural problems in my view.
“The recent market bounce back has been materially helped by the US dollar softening, and the Yen also, aiding the economic figures, but there hasn't actually been much of an improvement in fundamentals.
“There has also been some very obscure merger and acquisition activity, which questions some of the truths behind real asset allocation in the country and who is providing loans.
“Overall, China is still a cloud on the horizon, with great potential to shock on the downside, though that being said, they may still muddle through and dare to deceive!
“This disruption though has given real opportunities to stock pickers such as myself to get some quality companies at reduced prices.”
US interest rates key to 'income' world
Richard adds: “Core inflation in the US is double that of other equivalent economies and therefore interest rates are likely to rise. And US interest rates are key to the income world. As long as rates go up at a steady pace, yield stocks should be fine.
“And despite the headlines, yields in Asia are still above the historic 10 year averages, though it is difficult to see corporate top line growth going forward.
“The top quintile of yield generation in Asia is focused on Australia and New Zealand, and even then, industry wise, this is focused on financials. Capital expenditure investment has become very low, particularly in Australia, and the sustainability of some of the high dividend rates is questionable.
“Korea has scope to improve its dividend payouts, although from a very low base (almost half that of the regional average). Don't hold your breath for a sudden increase, but the new taxation rules are starting to have an effect.
“Of my stocks, 20% have had flat dividends, 20% cut (though this was not unexpected considering the sectors they are in) and the remaining 60% have increased their dividends, which has contributed toward my fund performance.
“The areas offering the most opportunities are outside of the traditional defensive sectors and into almost contrarian areas like Hong Kong property companies. Fundamental analysis is still absolutely key though to avoid falling into value traps.”
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The managers' views are their own and do not constitute financial advice.