Asia growth engine not threatened by Trump, says Barings

Emma Wall | 30/01/2017

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Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Hyung Jin Lee, head of Asian equities for Barings.

Hello Jin.

Hyung Jin Lee: Hi Emma.

Wall: So, let's start by saying Happy New Year.

Lee: Happy Chinese New Year. Year of the Rooster.

Wall: Indeed, and last year was the Year of the Monkey. Which was supposed to be unpredictable, which in terms of politics and macroeconomics it certainly was. But in terms of markets actually Asian equities did quite well over the last 12 months, despite people being nervous about the market up 9 per cent.

Lee: Well, as we have been saying for quite a while now. The fundamentals and the equity market outlook for Asian equities was not as dire as perhaps the market was pricing in. Now there is volatility, no doubt and there is sort of what we call tail risk or event risk in the horizon. But I think the underlying fundamentals still remain what we thought they would be. Of course, there are challenges and potential pitfalls for the Asian markets is of course one of them is continuing slowdown of Chinese economy.

That's all sort of what I call normal type of stuff. It is not financial policy, nor is it how is commodity pricing going to differ. So, in terms of that context I think again Asia and emerging markets in general were outperforming for most of the year last year. Then you had some turbulence with US presidential elections, as well as the rate hike. There was some volatility there but again as you see in year-to-date although much too short to say anything. But again, going back into that pattern, you are seeing more and more interest build up in emerging markets especially in Asia.

Wall: I'm glad you mentioned President Trump there, because I suppose he is the spectre on the horizon for China and Asian equities in the way that he wasn't this time last year. This time last year he was definitely an outsider. There is a lot of talk from Trump about China and China policy obviously, that's something for politicians to be concerned about, but for investor in Asian equity should they be concerned about that.

Lee: Certainly, I mean in cases where there could trade friction as indeed there already seems to be between the Trump administration and other countries. Again, that was one of the things that I meant when I talked about little bit of event risk in the horizon. I think from our perspective certainly that is concern for us, in the short term.

But even if that occurs I think it will, I mean hopefully be contained and no one really benefits from a sustained trade tensions. I think in terms of equity markets it could cause some turbulence, but for us of course we will be looking at that kind of volatility as both opportunity as well as strength.

Wall: I suppose there is one thing to say that unlike 10 years ago, where China and Asia were heavily reliant on the US consumer in order to grow the bottom line of both business and the country. They are now much more self-contained and the trade within the Asia region in between those countries is growing daily isn't it. So, in a way they are increasingly self-sustaining.

Lee: Yes, thank you very much. You seem to--I think you should write our strategy. I think that is precisely what one of the points that I'd like to point out to our investors. That Asia has sort of its own internal growth engine if you want to call it that. And that will barring extreme cases, black swan events if you want to call it that. That will continue to run and it might not be the most exciting thing in the world, but just steady economic growth, steady corporate earnings growth hopefully and in the long term of course, personal income growth. That's going to drive domestic event grow.

Wall: And what about where you are seeing those opportunities. Because obviously with the rising market there must be some sectors that are looking quite expensive and others that perhaps the fundamentals are more compelling.

Lee: Yes, I mean if there is sort of more unique characteristic of the recent markets in 2016 and year-to-date has been what we call the value rally or outperformance of what are traditionally considered lower growth sectors and companies. Certainly, they had been very, very cheap in terms of valuation before, and one can argue that many investors were sort of hiding away in more what are thought to be more stable, more predictable companies and sectors like consumer as well as healthcare. Again, that is fine as long as the fundamentals and earnings outlook back that up.

Indeed, we also have participated in the rallies, if you want to call it that of what are traditionally called cyclical sectors. But for us the earnings growth, the earnings outlook has to be there and we're not going to invest in stocks or sectors just because their share prices are down and perhaps they would have like a trading pick up. So again, we are looking mainly at the long-term fundamentals, long term earnings story and long term growth stories. So, for us in terms of day-to-day research pretty much the same.

Wall: Jin, thank you very much.

Lee: Thank you.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

This report appeared on www.morningstar.com.au 2017 Morningstar Australasia Pty Limited

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