Asia Pacific Leaders

Emerging Markets: time horizons matter

MSCI EM Index -dispersion around mean return for top 10% top / bottom stock performers

Our clients have understandably been keen to discuss the changes that have taken place within our business. Set against that, however, we have been careful to ensure that the majority of our time and attention remains on companies. As part of this, we have been discussing the broader forces being felt by companies across the Asia Pacific region, particularly the extraordinary surge of investment in AI. Although AI is often viewed as a US-focused phenomenon, many of its leaders are actually found in Asia rather than America. They include the manufacturers of the advanced semiconductors that supply computing power to data centres, the companies whose technology tests those semiconductors for reliability, and the suppliers of essential components to data centres.

We are aware of the intense geopolitical pressures that surround some of these companies, such as the desire to shift production of semiconductors to the US to keep the most advanced chips out of the hands of America’s perceived enemies. These pressures may influence corporate behaviour in a way that is not to the advantage of long-term shareholders. This is something we are debating and watching closely. To deepen their understanding of this subject, two members of our team recently visited South Korea, which, along with Taiwan, is at the heart of the global semiconductor industry.

A final illustration of continuity over the past quarter: the number of companies entering and leaving the portfolio remained typically low. We added three new holdings while selling five.

Activity

New holding: AIA (Hong Kong: Financials)

Over the course of more than a century, the life insurer AIA has steadily developed a distinct culture combining a conservative approach to investment with an entrepreneurial structure. Its business is built around a high-quality salesforce who foster long-term relationships with their customers. AIA demands higher levels of professionalisation from its agents than many of its competitors, who often rely on armies of part-time agents. Although this means there have been times when AIA has grown more slowly than its peers, putting the needs of its customers above drive for short-term expansion has enabled it to build a premium brand. It now has an opportunity to grow by fulfilling unmet insurance needs across China, India and Southeast Asia. While those countries are getting richer, they lack social safety nets, making insurance products a necessity. This is especially true in China, where the regulator has recently allowed AIA to expand into new regions beyond its historical areas of strength in Beijing, Shanghai, and the Pearl River Delta.

New holding: Jardine Matheson (Hong Kong: Industrials)

Jardine Matheson is a complicated company whose journey towards greater simplicity and professionalisation has the potential to reward patient investors. The current chairman inherited a sprawling conglomerate whose interests span retail, property, financial services, healthcare, autos, construction equipment, hotels, and mining. His vision is to appoint high-quality professionals to run the company’s various business units, giving them well-defined targets and then granting them autonomy to hit those targets. He keeps a deliberately low profile and acknowledges the missteps the business has made over the past decade. Both are valuable signals of humility. He has sold a number of businesses not viewed as being central to the company’s long-term growth story in a way that would have previously been unthinkable.

New holding: Singtel (Singapore: Communication Services)

Singtel has significant shareholdings in various telecoms businesses across Asia, including the Philippines, Indonesia, India, Thailand, and Australia. Telecoms companies tend not to grow quickly but they do deliver cash to their shareholders through dividend payments in a steady and predictable manner. That its share price looks low relative to its underlying profits suggests that it remains deeply out of favour among investors despite the fact that, under the leadership of Kuan Moon Yeun, we believe it is better managed than it has been for some time. Since 2021, he has brought more focus to the company by selling off businesses in areas such as digital marketing and online advertising that had been bought by the previous management team.

Sold: Advantech (Taiwan: Information Technology)

As share prices surged sharply higher across parts of the technology sector, we have trimmed our exposure to it by selling the holding in industrial ‘internet-of-things’ company Advantech. Our confidence in its future prospects had faded and the valuation of its shares had begun to appear demanding.

Sold: Dabur (India: Consumer Staples)

Dabur directly contributes to improving the health and wellbeing of the Indian population by selling herbal and Ayurvedic products covering hair care, oral care, skin care, home care, food and beverages. While it remains a high-quality company, its share price no longer left any room for disappointment.

Sold: Tata Communications (India: Communication Services)

Tata Communications is in the midst of a transformation, evolving from a utility company into a technology business partner, offering a range of digital services and solutions to its clients. While profitable, this is also a highly competitive area and our confidence in its future growth has weakened. We can now find stronger ideas elsewhere.

Sold: Tokyo Electron (Japan: Information Technology)

Tokyo Electron sells manufacturing equipment to semiconductor makers such as Samsung Electronics and TSMC. We had become concerned that its share price was too high.

Sold: Unicharm (Japan: Consumer Staples)

Through the 2010s, Unicharm sold an increasing number of nappies to an aging Japanese population, but we failed to anticipate the difficulties it would encounter in replicating its success in other parts of Asia. With the benefit of hindsight, we misidentified the challenges that face Unicharm, which could prove harder for it to surmount than we once believed. After meeting the company’s management, we concluded it is not responding to tougher competition and decreasing brand loyalty sufficiently quickly. We should have sold our holding sooner.

We estimate that, of the holdings in our Asian portfolios, roughly three-quarters are primarily focused on sales in their domestic markets, offering them a useful buffer amid ongoing concerns about potential disruptions to international trade. With valuations across Asia currently standing at what we regard as extremely attractive levels, we remain confident in the prospects for returns from our carefully selected high-quality companies.

1 Source: Bernstein China SMID Internet: Diamonds in the Sky...Initiating with Trip.com Group November 2024.

To help finance the additions mentioned above, we trimmed our holdings in companies whose financials we think are most vulnerable to new tariffs imposed by the Trump administration, such as Cochlear (Australia: Health Care), CSL (Australia: Health Care), Fisher & Paykel Healthcare (New Zealand: Health Care) and Dr. Reddy’s Laboratories (India: Health Care). All of these businesses import products into the US from manufacturing plants overseas. We sold ResMed (Australia: Health Care), partly for valuation reasons and partly in view of its susceptibility to potential changes in US tariff policy. We continued to reduce the holding in TSMC (Taiwan: Information Technology) which is investing heavily in new factories.

Elsewhere, we reduced our holding in Mahindra & Mahindra (India: Consumer Discretionary) to control the size of our position. We also pared back holdings in Godrej Consumer Products (India: Consumer Staples), Marico (India: Consumer Staples), and Tech Mahindra (India: Information Technology) partly for valuation reasons but also to help finance the new investments mentioned above. A similar logic informed our complete sale of Tata Consumer Products (India: Consumer Staples).

After a long period in which returns from the US have outperformed those from most other regions, we hope investors will begin to pay attention to the attractively valued companies to be found in the Asia Pacific region. If the US economy falters, then economies across Asia will also be impacted, albeit to differing degrees. We are also conscious that political risks appear to be rising in many Asian countries. Those risks are not the same for every country or company. For example, the region’s large technology companies, many of which are found in Taiwan, South Korea and China, look particularly vulnerable to a global slowdown. India, by contrast, is more isolated from turbulence in the wider global economy. The Philippines, meanwhile, could receive a significant economic boost if a global slowdown results in a meaningful fall in oil prices.

Predicting how any of today’s economic and political challenges will unfold lies beyond our remit and our skillset. Fortunately, the Asian companies we invest in tend to have long memories; they still have the scar tissue formed during previous crises. These businesses have been forced to learn, to adapt and to become resilient. As a result, we believe they are set up not only to perform when conditions are fair but to navigate through whatever political and economic turbulence lies ahead.