Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by JPMorgan Asia Growth & Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Any regular reader of the financial press, investment research or the material produced by fund providers will be familiar with the idea of the ‘top down’ and ‘bottom up’ elements of an investment process.
The former, also known as ‘macro’ investing, is based on big picture economic, market and political analysis. The latter, sometimes referred to as ‘fundamental analysis’ is focused on understanding the strength of an individual company and, on that basis, being able to place an accurate value on its shares.
Most investors will claim that they combine the two, but the extent to which an investment process favours one or the other can depend on where that process is being used.
A wide view
A bias toward ‘bottom up’ stock selection can be helpful when it comes to eliminating market noise which can occur particularly where political or economic events generate significant interest. This has been especially exemplified in the case of China over recent months. The Chinese government has made critical interventions in a number of sectors over the last year causing uncertainty across the market with little heed paid to the real financial position or opportunities available to the companies within it. China has experienced a widespread sell-off and the performance of the MSCI China Index now lags the MSCI ACWI over one, three and five years.
For those with exposure to Asia, this recent sell-off in China and the possibility that it might be a precursor of further pain has presented a major potential headache, given that Chinese stocks have generally driven the region’s returns for much of the last decade.
However, for the managers of JPMorgan Asia Growth & Income (JAGI), who pursue a ‘bottom up’ approach the sell-off has created new opportunities. Taking advantage of bombed out valuations, they have been buying attractive companies in industries which are not affected by the new government regulations, as share prices have fallen as part of the broad sell-off in the wider market.
The individual company focused approach also means they can make decisions largely without worrying about the direction of the Chinese or any other Asian economy. Instead, the team, led by Ayaz Ebrahim and Robert Lloyd, seek to identify high-quality companies which look set to grow their earnings over the long term. In short, they look for companies that will still be great in five to ten years – regardless of where in Asia they are based - and seek to buy these at the right price.
Here, we discuss four such stocks from across the region – including two that the managers added to in the wake of the Chinese sell-off.
Bringing flavour to your portfolio
One of the stocks the team has identified as being on a newly-attractive valuation following the broad sell-off in the Chinese market is condiment manufacturer Foshan Haitian. Renowned for being the world’s largest producer of soy sauce, the company has invested heavily in increasing its production volumes over the last few years.
Demand is being driven in part by the urbanisation trend in China, alongside a more general shift in consumer habits, which has fuelled a significant expansion in the catering service market. With almost half of China’s condiments consumed by the 3.9 trillion yuan catering services sector, its continued growth should provide support for Foshan Haitian for some years to come.
Despite this strong outlook, the company’s shares had halved at one point in 2021, which the managers of JAGI considered a good opportunity to top up their holding.
Another of the sell-off’s victims which is in favour with the team is bio-medical devices manufacturer Shenzhen Mindray. The company’s share price also fell sharply in 2021, despite it seeing a surge in demand for its flagship ventilators throughout the last two years as the Covid-19 pandemic raged worldwide.
While the company is known for its ventilators, it produces a broad portfolio of other products, including ultrasound machines, of which it is a market leading producer in key markets, including the United States. Shenzhen Mindray invests heavily in developing new iterations of its devices, including a large range of artificial intelligence integrations into its latest generation ultrasound machine, improving efficiency and usability in its devices.
It is this strategic focus on growth, the company’s strong reputation in its end markets and its track record of delivering on its strategy that gave the JAGI team the confidence to add to their holding in 2021.
New solutions for Asian markets
Reflecting their country-neutral approach, the team has found multiple opportunities across the Asia region. Two companies that exemplify the managers’ focus on quality stocks both operate on different sides of the same coin, the growing role of technology in Asia.
On the one hand, Singapore-listed Sea Limited (NYSE: SE) provides sophisticated solutions in three key markets that have all flourished during the pandemic: online gaming, e-commerce and online payments. SE trades on a relatively high valuation. However, recent developments suggest this continues to be justified. For example, it has just significantly expanded its e-commerce operations in Latin America, alongside other key e-commerce markets including India. This expansion demonstrates the company’s continued commitment to growth, given that it is already the dominant operator in much of South East Asia.
On the other hand, JAGI holds a significant stake in BCA, Indonesia’s largest bank. While this kind of long-established banking stock might not typically spring to mind as ‘innovative’, BCA has focused in the last few years on its mobile banking platform Blu, which it intends to float separately in the next couple of years. Banking adoption in Indonesia is still comparatively low and, with such an unusual geography, increasing the uptake through traditional means is challenging. However, BCA has used its inherent knowledge of the market to gain an advantage on more upstart technology rivals.
While Sea Limited and BCA share some common traits in terms of how they are seeking to grow, their differences show the value which the team at JAGI place on fundamentals, and the relatively low value they place on sector or country factors.
A portfolio spanning stocks from internet giants to traditional banks demonstrates the benefits of this diversified, benchmark agnostic approach, and JAGI’s performance numbers support the case for it.
Morningstar data shows JAGI is ranked first in its sector over five years to 10 November 2021, having delivered NAV returns of 77.5%; well ahead of the MSCI AC Asia Pacific Index return of 54.9%, and easily beating the average trust in its peer group which delivered 48.8% over the same period.
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