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In the third week of our ISA event series, we looked to Asia. From the big picture outlook for China, through to the investable opportunities in Vietnam, our speakers addressed the myths and realities of this often under-appreciated region.
Ed Butchart on emerging markets
To kick the week off we had a presentation from Kepler’s in-house manager Ed Butchart. Ed joined Kepler in 2021, having previously been chief investment officer at Sloane Robinson, and manages two emerging market funds, both of which he previously managed at Sloane Robinson.
Ed looked at the big picture for emerging markets as a whole. He started by looking at historical returns of emerging markets, versus other regions and country specific indices. Although emerging markets have been more volatile, they’ve also had periods of strong outperformance.
Ed then moved on to look at valuations in emerging markets alongside prospective earnings growth. He also looked dollar strength relative to emerging market performance, something that has come into view over the past 18 months due to the Fed’s rapid interest rate hikes. Significantly, he noted that projected growth for many emerging market countries is way ahead of the US in dollar terms.
Finally, Ed discussed some of the dynamics around commodities and then devoted some time to China, a country that has by far the largest weighting in emerging market indices.
Baillie Gifford China Growth
China is a market that stands apart from the rest of the world. Whether that is extended zero COVID, a reasserted absolutist leadership or new laws and regulations, investing in China has been challenging for the last few years.
Baillie Gifford China investment specialist Ben Buckler joined us to discuss how Baillie Gifford China Growth (BGCG) approaches the challenge of China. Fundamentally, he said that their investment is driven by a small number of companies emerging from China, which are less impacted by domestic growth or interest rates.
Crucially, the team look to invest in disruptive, secular trends and the companies that are channeling these most effectively. As a result, Ben explained that the team’s perspective on company fundamentals can therefore be markedly different to that of the market.
Fundamentally, they are happy to accept short-term volatility on the path to long-term returns, although appreciate this can be uncomfortable for investors.
Having set the stall for the firm’s approach, Ben then discussed the landscape in China. On regulation, he remarked that we have seen a decade of unrestrained growth in the digital space in China, with very lax regulation. The team’s view is that the regulation in principle set out by the Chinese seems broadly sensible and while it may impact short-term earnings, the issues it addresses are potent, such as monopolization.
He also highlighted the growing role of private business in China, within a context where consumers are holding significant cash and interest rates remain low.
He then discussed the companies that his team have been focusing on within China. One interesting focal point was the climate leaders emerging from the country, with significant government backing turbocharging the technological development, as has been seen in other sectors previously.
Ben said: “We can see a China which is increasingly being driven by its new economy, by domestic demand – and those are the areas we’re focusing on. That opportunity does not seem to be reflected within investors’ portfolios.”
Ashoka India Equity
Ashoka India Equity (AIE) has been the top performer in its peer group since launching in 2018. It also operates with a unique fee structure. The managers receive 30% of outperformance generated, which is calculated over three-year periods, but no other management fee.
Investment director Ayush Abhijeet presented on Thursday and talked through this structure in greater detail, along with highlighting how the trust approaches markets. Notable in this regard are the trust’s valuation process and the way in which they treat corporate governance.
Moving on, Ayush looked at some of the key reasons to invest in Indian companies. Two points that stand out here are the country’s growth potential versus China, with India’s younger, growing population a key factor. The other point here is how companies in India tend to receive little research coverage. This should in theory provide greater opportunities for active managers to exploit.
Finally, Ayush ran through some of the sectoral exposure that AIE has and the opportunities that exist within them. That includes healthcare, financials, industrials and the country’s growing technology sector.
Vietnam Enterprise Investments
To finish off the week we had a presentation from Vietnam Enterprise Investments (VEIL), a country specific trust that invests in Vietnam. Manager Thao Ngo presented, alongside Dominic Scriven, the founder and chairman of Dragon Capital, the asset management group which launched VEIL.
The pair talked through what makes Vietnam an attractive proposition. They noted some of the manufacturing relocation that is happening in the country, with major companies like Apple, Nike and Intel moving production there. The managers noted, for example, that 60% of Samsung phones are now made in Vietnam and that Lego recently invested $1bn in the country to build a factory.
This partly explains why Vietnam has seen substantial GDP growth over the past three decades. That in turn has led to the creation of a wealthier middle-class, who are helping grow the country’s consumer goods and financial services industries.
Thao then looked at VEIL in some more depth, looking at the trust’s performance and some of its holdings. She also talked through the reasoning behind some of the investments the trust has made. There was also some discussion of valuations, with Thao noting that the market seems to have bottomed out in late 2022 and may be on the path to recovery.
Dominic then talked about Dragon’s offering and how the company was established in the early 1990s. He then talked through what the company is aiming to do and noted that Dragon are the largest private investor in the Vietnamese stock market.
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