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Inflation, interest rate hikes, geopolitics, recession – financial markets are not short of topics right now. How are the Asian markets faring? We talked to Bill Maldonado, CIO of Eastspring Investments, about current issues in the Asian financial markets and emerging investment opportunities in Asia equity and Asia bonds. Maldonado explains the opportunities within China equities, the sectors investors should pay attention to, the rise of ASEAN and India and the complementary between China and India.
Transcript
Thomas Schalow: The banking crisis in the US has brought back memories of the IMF crisis in 1997 and the Lehman moment in 2008. What are the current implications for the Asian financial sector?
Bill Maldonado: So, Thomas, I think actually you’ve kind of alluded to it in the question, it’s brought back memories. But the situation is very different to the situation we faced in the late 90s and you remember the tequila crisis than the Asia financial crisis, LTCM, all kinds of bad things happening in the world and during the global financial crisis in 2008. At those times, there were huge imbalances in the global economy, slightly different in each case, and those imbalances have been building up for a long time and kind of finally cracked. And we had the ensuing crisis. I don’t think that we’ve got those sorts of imbalances in the US or any other banking sector at the moment. Of course, people are nervous. People are very worried about it. As you say, it brings back all those nasty memories that those times we lived through. But I think essentially, there was an error or miscalculation with respect to some of these regional banks, perhaps in terms of the regulatory standards that were applied to them that led to some excesses being built up, excess risk in discrete single organisations and you know we saw the resulting outcome. But I think in terms of contagion and the broader implications for financial companies, not just in the US but around the world, it’s much more muted, much more limited than in the previous crises that you’ve mentioned. And I think we’re more or less through this now. I think the world is moving on now. I think we’ve dealt with this and the world, I think, is ready to move on.
Thomas Schalow: The Russia-Ukraine war has led to more geopolitics in financial markets, so, what are the key changes and implications in Asia 15 months after the outbreak of the war?
Bill Maldonado: Well, Thomas, again, as you say quite rightly, what it’s done is sort of raised the general geopolitical tensions around the world and a tension that was already there between the United States and China. And that’s a very important tension, not just for Asia but for the rest of the world. But it’s very relevant in Asia. And I think the Ukraine crisis has in some ways fed into that existing tension. And broadly speaking, that’s not very helpful for kind of global trade and smoothing out those global tensions. But the thing that really, really matters and perhaps we’ll touch on later is the strength of the Chinese economy and how that impacts the countries nearest to China, the Asia region. And in that regard, actually, things are now recovering quite strongly, so it’s not great to have this geopolitical backdrop at all. It’s not a good thing, but actually on a on a short-term day-to-day basis, what matters more is the strength of the Chinese economy.
Thomas Schalow: So, let me add directly to this. Interest rate hikes and inflation have been the key issues in the market over the past two years. So how has this mix affected the economies in Asia?
Bill Maldonado: I think this is a huge change and, you know, we’re used to dealing with changes in markets. Things change all the time, inflation goes up and down and interest rates go up, down, whatever. But this is the first time in 20 years or so since the early 2000s that we’ve had inflation issues of this sort of magnitude. And we’ve had the response from central banks, particularly in Europe and the US, to that inflation. And that’s a sea change, that’s a big change and there are many investors out there. I mean, if your career is shorter than 20 years, you haven’t experienced this. So, this is a really big deal and this has impacted corporates and economies and investors all around the world and Asia is no different in that regard. Overall, we would say that there’s less of a direct inflation problem across most of Asia than there is in the rest of the world, but that doesn’t lessen the impact of this very big change that is happening in some of the world’s largest economies. There is a feed-through effect: To Asia through trade, through other mechanisms. So, it’s something that people here really take note of.
Thomas Schalow: Interest rate hikes on the other side have made international bonds more attractive again. So, in the current environment, what is the case for Asian corporate bonds and what for Asian equity?
Bill Maldonado: Look, there’s a whole generation of bond investors and bond managers out there that haven’t seen interest rates and yields at these levels. So, there are some very attractive opportunities around. Asian bonds are very interesting. I think there’s a bit of a historical hangover that isn’t justified by the data and by the outcomes over the last 10-20 years. What I’m referring to is that there’s a bit of a yield premium. Despite default rates being the same as or lower than other markets, despite the average duration of the benchmark being shorter than other markets, despite the low correlation between that asset class and other bond asset classes around the world. We somehow still see Asia trading at a bit of a premium, both in investment grade and in high yield. And that’s just not justified by any financials that we can think of, any fundamental that we can think of. And therefore, that means it’s an opportunity. It’s an opportunity to capture a yield premium and it’s an opportunity to diversify a portfolio. Particularly, I would say for non-Asian investors and we see a lot of interest particularly from European investors in this. So, I think it’s a really great question and a really good opportunity for people in Europe to think about.
Opportunities in Asia – China Equity
Thomas Schalow: The property crisis, China’s big tech regulations, the drastic COVID regime and international attention, so Chinese equities had two tough years. So, what is the current case for China equity?
Bill Maldonado: Of course, you’re right. And I would say it’s not just Chinese equities, but the Chinese economy, and Chinese society. Everything. It was a tough couple of years. And I think that investors were already worried about the geopolitical situation in China and the tensions with the West and this kind of piled on the concerns. And I think the way I would summarise it is that many Western corporates, many Western investors, have lost a bit of confidence in China. It’s become a bit too unpredictable for them, right? So, they’re nervous about it, but we know that memories in markets are short. They’re always remarkably short, especially when the opportunities are as significant as they are in China. And we’re already seeing that people are overcoming those reservations rather rapidly. We see Western companies coming to China and wanting to continue to do business there. We see Western politicians coming to China, maybe not in a very high profile, but it’s happening. And on the other side, we see China ready to receive those visitors and ready to do business. So, I think the opportunities are very, very significant and we’re beginning to put the last two or three years behind us and move forward. And I think that’s the right thing to do and I think that there are some strategic sectors which investors can focus on which are much less exposed to these kinds of tensions. And that’s where we would propose people focus their attention.
Thomas Schalow: Can you give an example of those sectors and industries that you are favouring currently in this situation?
Bill Maldonado: Yes, absolutely. On the one part, China is really serious about greening the economy and moving to a much cleaner kind of environment for its citizens. This is not empty talk. This is real. So, anything to do with greening the economy, green tech from solar panels to wind to electric to battery technology, that kind of stuff, I think that’s really interesting. It’s a very strategic sector and investment is going to continue into that sector for sure. Another one is semiconductors. Clearly, there is a tension between the West and China on semiconductors. China doesn’t want to be held back by a lack of access to semiconductors, so it’s going to invest a lot of money in developing its own technology. And again, that’s a sector that investors would be well advised to take note of. It’s very strategic and long run. So, I think those are the two that jump out the most for us.
Thomas Schalow: China plus One is an active trend in many industries. So, what does this thinking mean for Asian investments? And should international investors apply something like this for their investments as well?
Bill Maldonado: I think this is a very real theme. Often you get these buzzwords and themes in markets and they’re not very long-lasting and they’re not particularly investable and they’re just buzzwords, but this is real, it’s happening. We see it all the time with the companies we’re talking to, and I think that there are beneficiaries across Asia, particularly in ASEAN markets, particularly in Vietnam. India is not officially in ASEAN, but let’s think of it as a country that benefits. We see it happening on the ground, manufacturing capability being built up, the infrastructure being built up, the know-how, the technology. And this is not something that’s going to change overnight. People want and need that diversification, and even if they don’t want it – their stakeholders want it. The investors in the corporates. So, it’s got to carry on and it’s not getting rid of China, it’s diversifying from China. And in any case, China’s moving up the value chain, it’s no longer the lowest-cost manufacturing centre in Asia, by any means. And that’s not inflation in the Chinese economy, that’s a deliberate government policy that’s taking place over many, many years. So, for many reasons that are coinciding at the moment, people need that diversification. And that ecosystem is growing and there are beneficiaries you can invest in.
Opportunities in Asia – ASEAN
Thomas Schalow: So, you already touched on my next two questions, so especially the ASEAN region has recently attracted much more interest from international investors. So, where do long-term investment opportunities in ASEAN arise?
Bill Maldonado: Yes, we’ve touched on some of them. So, Vietnam has been a very high-profile recipient of the sort of China plus One theme. We touched on India, there are others you know, for example in Thailand, there’s been quite a long, well-established auto value chain that was driven primarily out of Japan and that will continue to grow and thrive. So, I think almost in every ASEAN country you can look, and you can find opportunities and what we’re seeing then is that the listed markets, the capital markets in those countries are also changing shape. In some countries, there may have been quite stayed industrial conglomerate-driven markets and we’re seeing much more diversity of companies coming to market now, more dynamic manufacturers, some tech, some e-commerce. And so, the whole nature of these markets is evolving quite rapidly as well. And all of that creates opportunities. But you need to have people on the ground, you need kind of on-the-ground knowledge of what’s going on and I think that’s an important thing for investors to retain in mind.
Thomas Schalow: So, you also touched India and Indian equities. Indian Equities performed well last year. They have been the top-performing asset class so far. But the Indian financial market also has been regarded as very difficult for the long term. So, what is boosting Indian equities, what has initiated this trend, and can this continue? Can India catch up with China in the long term?
Bill Maldonado: There are so many dimensions to that question to us. But to try to give an overview, I think that India is really focused on this “Making India” initiative that the government has been driving for quite a while now. And I went back to India about a month ago and I hadn’t been on the ground in India since before COVID and I was really surprised at some of the progress in the infrastructure. It moved on really quickly. There’s now some tech manufacturing there and you can see it. It’s sort of really happening. Secondly, I would say that India is a market, if you wait until it’s very cheap to buy it, you won’t find many times in the sort of cycle that you can do that. You generally are buying a pretty fully valued asset and that’s already discounting some of the growth ahead. That’s a more typical pattern for India. And that’s what we’re seeing now. But I think that there really is a transformation happening and the final point I would mention is the one that I mentioned earlier that the capital markets in India are changing quite rapidly. It used to be two or three large conglomerates that dominated the listings. Everybody knew them. They had very high weightings. And you didn’t have a lot of choice but to be invested in those companies. Those companies have themselves spawned new entities, there have been other entrants to the market, e-commerce, tech. You know, Amazon and others have been really active in the market, a lot of consumer stuff. The palette that I have as a local investor now is changed a lot and will continue to evolve. So maybe people have a mental picture of India from 10 years ago that isn’t really the reality on the ground now, so that’s worth thinking about as well. And look, I would say one final thing because you’ve asked a lot of things about China and India quite rightly. I think those are the two key economies in the region. There’s a lot of complementarity between China and India as well. The reason that you might not be in a sector in China is exactly the reason you might be investing in a particular company in India. And there are areas where China is going to continue to be very strong. Battery technology, for instance, it’s amazingly strong. That’s not going to be a feature of what you do in India in the foreseeable future. So, there’s a great deal of complementarity between the two as well.
