Matthews Pacific Tiger Strategy Fall Outlook: Entrepreneurial Companies Capture Growth in Asia
Amid a global pandemic and continued U.S.-China trade tensions, quality-growth companies remain strong performers. Portfolio managers Sharat Shroff, CFA, and Inbok Song discuss the opportunity set for growth investors.
Q: How have countries in North Asia contained the spread of COVID-19? What are some of the challenges ahead related to COVID-19 in South and Southeast Asia?
In China, South Korea and Taiwan, the spread of the virus has largely been contained. Although there are risks of localized outbreaks, the region is benefiting from a strong medical infrastructure, robust contact tracing and a population which accepts health care directives issued by authorities. As a result, economic activity is picking up in North Asia.
In South and Southeast Asia, especially in more populous countries such as India and Indonesia, citizens are still grappling with the first major wave of cases. These countries were forced to ease their lockdown measures because the economic cost was too high—a move which fueled a rise in cases. That said, recovery rates in the region remain strong and testing processes are being enhanced to better contain the virus, which leads us to believe the curve will begin to flatten in the near future.
Q: Amid U.S.-China trade tensions, what are some of the risks and opportunities for Asia's private sector?
On the risks side, we've seen greater market volatility in reaction to daily headlines. At the same time, we have also seen many private companies in Asia being quite nimble and proactive in dealing with the associated risks. Private companies are increasing investment in other parts of Asia to augment supply chains including manufacturing activities and assembly functions. We believe India is an attractive destination given the significant end-market demand potential, while Vietnam is appealing because of the established infrastructure and availability of labor.
In our opinion, China won't necessarily lose out in this environment given its key competitive advantages, and the continued shift towards more services-led growth. Over the last several years, the Chinese economy has increasingly become self-reliant in key aspects like availability of capital, and skilled labor. For instance, an attempt to constrain Chinese listings in the U.S. may create some volatility in the near term; but the increasing depth and breadth of equity markets in Hong Kong and mainland China may be able to provide alternate venue for some of this equities.
Q: What's driving the increased weight in China and Hong Kong for the Pacific Tiger Strategy?
We've been intentionally increasing our weight in China for quite some time based on opportunities we identify, particularly as the nature of the Chinese economy shifts away from exports and industrial growth toward services and domestic demand. Recently, holdings in China have held up better than other parts of the Asia region, which has also increased the portfolio's weight to China. We find opportunities in the consumer discretionary and technology side of China and continue to diversify our holdings. The portfolio's weight in Chinese financials has focused on insurance and brokerage companies to benefit from the growing wealth management and protection demand as income grows.
Q: What's behind the growing exposure to information technology in the portfolio?
We view our increasing weight in the technology sector as a continuation of our investment philosophy, which is focused on identifying sustainable growth. We are seeing more technology companies with sustainable rather than cyclical characteristics, both in the hardware and software industries (especially in the hardware), where we have found multiple companies benefiting from increasing pricing power.
Q: What is your outlook for the second half of 2020 and beyond?
We continue to see a bifurcated market in Asia. Certain sectors—such as technology, consumer discretionary and health care—continue to enjoy valuations that are creeping higher while other sectors are less favored. This dichotomy is perhaps most evident in China: If you look at the valuation for the MSCI China Index excluding several of the top names, it is somewhere in the low teens; it hasn't changed much. We are looking to identify businesses, in sectors like financials and industrials, where the combination of risk-reward remains attractive for the Strategy.
It's worthwhile to look beyond the health crisis and some of the recent noise to examine the backdrop for Asia, which is characterized by low interest rates. This translates to a better cost of capital. Oil prices are also at fairly low levels and the U.S. dollar is starting to flatline or maybe even depreciate after a long period of appreciation versus local currencies. In our view, these factors create a favorable environment for Asian businesses and earnings growth.
In terms of our portfolio, our approach remains premised on the idea of looking for sustainable growth, particularly in businesses that are domestically oriented. As such, a revival in economic activity across the region should benefit our portfolio holdings. We also tend to favor companies that have greater ballast on their balance sheet and able to survive the pandemic-related economic turmoil better than others.
Sharat Shroff, CFA