Transcript
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Erika van der Merwe (EM): Asia-Pacific is touted as a region vibrant with opportunity thanks to its demographic advantage, catch-up growth and technological prowess. But investors remain wary of some of the obstacles, such as uncertainty about China's role as an economic powerhouse and, more broadly, the difficulty of investing in a region made up of highly distinct markets. Joining me to discuss the angles are Thu Ha Chow, Robeco’s Head of Fixed Income Asia, and Joshua Crabb, who heads Robeco’s Asia-Pacific Equities capability. Welcome to both of you.
Thu Ha Chow (THC): Thanks for having us.
EM: Starting on the equity side, Josh, analysts like to point to the tremendous value opportunity in Asia-Pacific stocks. That sounds a lot like the argument made for emerging markets in general. Is that how you see it? How are valuations looking right now and compared to history?
Joshua Crabb (JC): Absolutely. The valuations are attractive. So we look at this from two perspectives, but the way we tend to look at this is with a price-to-book perspective. And the reason for that is we all know with rates going up, there is a potential of a recession. And the good thing about looking at a price-to-book valuation is the earnings aren't considered, right. So they don't make the thing, it doesn't make the market look more expensive because earnings are going to go down. So when we look at a price to book, the first point is Asia now is at the lower end of its trajectory. Over the last sort of 10 to 20 years, we're seeing valuations which are not that far off what we saw in the lows of March 2020 or the 2008 crisis. And even going back to some of the prior periods around the Asian financial crisis. So in absolute terms, the valuations are attractive. The second way is we look at that that ratio against the, say, the S&P 500. And what we're seeing now is a valuation gap to the US, which we have not seen since around the tech boom or the tech bubble that occurred in 2000. So you have two very, very strong metrics to look at from that perspective. And we think, you know, even with some negatives which we realize are on the horizon, a lot of those negatives are already in the price for Asia, not so much for other markets.
EM: Thu Ha, is the story different on the fixed income side? What's your overall assessment of the opportunity there, including on the valuation side?
THC: So if you look at the credit spreads of hard currency Asian credit, actually it had its scare pretty much last year, so that's with the Covid and the Chinese property. So that actually has already… then actually, since late November/December of last year, it actually has outperformed the general credit market. And particularly with the more recent scare within Europe and the US, Asian credit, particularly in the IG space, has actually been outperforming. So a little bit different in that sense. And that's because the fundamentals are, particularly for the investment grade names, with China reopening and some of the kind of headwinds of the Chinese property sector behind us, people are more confident that the credit quality there, the fundamentals are actually quite stable.
EM: It's interesting, Josh and Thu Ha, to have this conversation combining these two asset classes, because I'd like to have a look at some of those underlying reasons for valuations. And I think to a large extent, perhaps the question is more directed on the equity side then, given what you're saying. Having China as your anchor economy has its benefits and its problems: its growth is slowing, it's dealing with various systemic issues and that includes its property market, and there's some glaring geopolitical tensions. What's your assessment, starting with you, Josh, on the role of China in Asia-Pacific?
JC: Look, absolutely, you can't have a conversation about Asia without China coming up. I think a lot of the problem with this is it ends up becoming 99% of the conversation. So let's start with China. We're all aware of the issues, regulation, the tech sector, clampdowns in the property sector, Covid lockdowns. And as we were saying to people six months ago: we know this, it's about as bad as it gets, there's a lot in the price. Now, what we've seen with the rapid reopening is we saw a jump in the MSCI China for about 60%. Everyone got very, very excited and that's tailed off to a bit. We've seen about a third of that sort of unwind, as people have you know, sort of come to terms with that. So what we're going to see now is what's going to happen with earnings. And that takes time. We all know reopening happens. It happens over a slow period. We've seen the roadmap. We've seen it in places like the US, we've seen it in places like Europe. That will continue to happen. Now that brings us up to the second point. So some of the longer-term issues, we can talk about demographics, we can talk about geopolitics. And these are much more difficult questions to answer, some of them become quite philosophical. Now, this is where I like to just drag people a little bit away from that conversation. Personally, I think there's going to be a rebound there in the short term, either way, I think most people can get their mind around that. So let's assume you have a more negative take longer term for some of those reasons. And this is where I would like to remind people that Asia is about more than China. 681 million people in ASEAN. Japan, a fairly technologically advanced country that can help in supply chains. India, another 1.3 billion, probably the world's most populous country now. So these things are also there now, something maybe we can touch on a bit later. But even if you think that supply chains are going to get broken, et cetera, that is going to be a boom. If there's less in China, there's going to be more in Indonesia, there's going to be more in Vietnam. So don't forget where those opportunities are going to sit.
EM: Well, a slightly different perspective on those opportunities. I'd like you both to have a listen to this clip from Bloomberg TV. It's Julia Raiskin from Citibank, just showing her perspective on their business in the region.
Voice fragment: In a way, the institutional market has become very index driven. And so I think if you look at the sort of MSCI emerging markets and global markets indices, it's hard to find an alternative that is as deep and liquid as these markets, right. The sort of the A-share markets, the A-share markets. We've had huge amounts of interest in India. We have a phenomenal platform in India, have been there for over 100 years. So that's been a market that has benefited. I think investors are also looking at Thailand and I think the China reopening story has played out there. Japan has also been in play in terms of regional markets. So I think there are alternatives. But obviously, you know, China is a huge part of the regional equity and investment pie and it can't be ignored.
EM: Thu Ha, do you agree it can't be ignored?
THC: No, and I think the longer-term story, particularly this week when we've had a lot of risk within SVB in the US and then Credit Suisse here in Europe, is just a reminder, actually, there is risk in all markets. And as Josh mentioned, the risk within Asia is actually much more honed in, and we talk a lot more about those and we should have been talking about these other risks elsewhere. So I think that's a positive, that the risks are well flagged and people know what they are navigating them. Again, I think as a region, the way that this recovery story that's panning out in China is actually very different from those that we've seen in the past. In the past, it has been kind of a sugar rush that basically impacted everyone, whereas now it's much more nuanced, much more focused on a much more stable and a much more longer-term consumption story, which I think is much more favorable for the region generally. As that clip you mentioned, you know, the initial flows of cross border travel is going to be regionally, a lot of the funding, etcetera, will be much more regionally focused given the geopolitical. So actually, in a way the fact that DM and maybe EM are polarizing a bit, means that you refocus regionally and that's not necessarily, back to what Josh was saying, that's actually not necessarily bad for the region as a whole. It is a movement within the region and refocuses on a consumption story that probably got left behind a little bit because we were so interested in feeding the US consumer, whereas now it's a reorientation onto the Asian and a regional consumption story.
EM: And Josh, can we strengthen those points that Thu Ha has made? If we look now beyond China in the region and the case for the region, how do you respond to some of your staunchest critics just regarding the region generally? Because, to be honest, if you take the argument of, for instance, it's vulnerability in terms of levels of development, the robustness of its financial institutions.
JC: Look, I've been based in Hong Kong for 22 years and I started my career basically going into the Asian financial crisis. So, I've seen my fair share of the cycles. And what I think, again, is you need to reflect on how these things happen. So, when you have a period of low rates, as we've had, and then you have them lifted very aggressively and unexpectedly, it creates gyrations throughout the economies. And traditionally, emerging markets have been hit very hard. Now, that has happened this time as well. Look at Argentina, look at Turkey, look at the pound. I mean, I put that in there in the emerging bucket a bit tongue-in-cheek, but you know, these things have happened. More recently, we've touched on SVB, Credit Suisse, but we haven't seen that much in Asia yet. I'm not saying it won't happen. These things, you know, tend to have an impact. But why we haven't seen it yet like we saw historically is because Asia did not take rates as low. We do not have an inflation issue in this part of the world, partly because of lockdowns, but that doesn't matter. So we don't need to hike as aggressively and we didn't make the same monetary and fiscal and currency peg errors that we made before because that we learnt in the Asian financial crisis.
EM: So you talk about those issues, but what if recession were to hit the global economy thanks to the Fed actions, thanks to ECB actions? How vulnerable is the region then?
THC: Yes, and I think that is already, as you say, much of that has been priced in to what Josh is saying. Because there is still this saying, that the US sneezes and the rest of us catches a cold, right? But as you say, it's much less than it used to be. That's the only thing we can say. No impact; no. But definitely less vulnerable because, from the last taper tantrum, all of these economies are extremely fearful that the day that the Fed tightens, that it would have terrible ramifications. And so a lot of things have been put in place to make sure that the impact is not been as bad as it has been. I do think the region has its own different inflationary pressures and that has to be sorted out in a different way. And that is much more supply-side led and things like that. So I think there is a structural change, there is definitely a structural change since those previous crises and we've definitely seen this. I mean, it's really come through in the last couple of years as we've seen this Fed move.
EM: So where are you investing then, both of you? Starting with you, Josh: what are the exciting, bankable themes for Asia-Pacific?
JC: We talked about the recovery trade, which we can talk about a bit later. Asia is much earlier to come out of Covid and this goes a bit to your earlier point: if there is a recession, caused out of, say, the US largely, you know we're still coming out of lockdown in Asia. We came out of it a lot later, we took pain for a lot longer and that will provide a domestic cyclical uptick. So there's that element. I talked on ASEAN, but let me give a bit more color around that. When we look at ASEAN, even before the geopolitical issues, even before Covid, the likes of Korea, Taiwan, etcetera, are starting to invest more in these manufacturing hubs. Because when people used to have an operation in Shenzhen, labor went up, land went up, they moved it to Dongguan, they kept moving it inland. It became more and more expensive. Same thing we saw in the US and Europe before that. So when we had Covid happen, you had that go into hiatus. And the problem is for these economies there's no handouts. They didn't get checks from the government to go and spend, because they don't do that. So the economy ground to a halt. Now, what's happening now is all that backlog is going back in. What have we learnt? We've learnt that Covid can disrupt supply chains, we've learnt geopolitics can disrupt supply chains. So more of that is going in. Now let's talk about the impact, which I think is critical as well. If you go and start a factory in China today, you basically build a factory, try and get some staff from your nearest competitor at a higher price and you operate. When you go and build one in Indonesia or Vietnam, you're literally going into probably an urban area that needs to be cleared, roads need to be built, a power station needs to be built, housing needs to be put in. Then you go and hire someone who's probably been working in the informal economy. They get a job with a regular paycheck. They can then take that to the bank, They can borrow money. So the multiplier effects in these economies are very, very dramatic. Keep in mind, 1 in 2 people in Indonesia do not have a bank account. These are not markets where we have saturation of products and services. So that's another example. Perhaps the last one I'll just quickly touch on is Japan, because that's a little bit different. Japan is an interesting story. We all know they had their bubble and they've had 30 years of very poor returns post that. And as a result, it got quite cheap. There was one problem with the cheapness in Japan, and that was that as shareholders, you never saw it. Cross shareholdings, no dividends, no buybacks. We all know the story. Now, a couple of things have started to happen. One is that we've seen the likes of the shareholder services, you know the Glass Lewis, the ISS of this type of world, where they put voting together. Now what that’s allowed to do, it’s allowed domestic investors who find it difficult for face reasons to vote against management and plus concentrate that power. And they came out in around 2019 and said we're going to vote against companies that don't meet their cost of capital, the directors, in three years’ time. Everyone got excited for a few months and then they forgot about it. Now that is starting to happen. People might not find the real belief in shareholder returns, but people do believe in not losing their job. And the easiest way not to lift your ROE is not to go and find new businesses or whatever else, it's to sell your cross-shareholdings, it's to return the cash on the balance sheet, do buybacks, pay dividends. This is what is happening now. In fact, even the stock exchange over there has now basically bought up the companies that do not have a valuation over 1x price to book, will be relegated to the second board. That is a huge face issue and that makes a big difference in in this part of the world. So there's a whole multitude and I could give you many more of investment opportunities in the region.
EM: Thu Ha, your perspective is quite different on the fixed income side. I could argue with some of Josh's points, some of them might be temporary or short term. Some of them certainly are the sort of emerging market dividend. What are the structural, longer-term, bankable, investable opportunities?
THC: This is where I can go a bit off piste a little bit. But I think if you look back and think about this bigger story of transition and this is what Josh touched a little bit about on technology transition. Covid did a remarkable thing in terms of allowing us to do things that were in the past not possible, unless you had physical change in infrastructure. That is extremely… if you think about that in developmental history, that is a big, big bonus for developing countries. Because now you can get goods and services, bank systems, without the need to go through that very expensive physical infrastructure change. So banking and bank ability for transaction, all of these things are being able to happen, as Josh mentioned in Indonesia. That transition story is very interesting, but for me, the energy transition story is actually massive. It was actually a very funny story because I was having a lunch with my 14-year old and he was writing an essay on the industrial revolution in Europe. And he said: “Gosh, mommy, you're really into this whole sustainability and energy transition. Could you imagine what the world would have looked like if they had actually understood renewable energy back when they had industrialization then.” I looked at him and I said: “You and your generation are going to see exactly that.” Because when you're thinking of, as Josh says, when they go into Indonesia and now they're building another factory, there are now energy options that were not available in the past that are being used. So the whole industrial revolution that may be happening within the region may take a very different path with different technologies, it's very different from taking something down than to be building something from scratch. So I think those are extremely interesting opportunities that we're seeing much more longer-term perspective. But when we look at the regulations and the sustainability and regulations in terms of where these economies are trying to position themselves, that makes a very interesting story for a very longer-term perspective.
EM: So in other words, you're saying there's strong policy and regulatory support for these developments?
THC: Yes. And it brings me back a little bit to bonds, because one of the things about… so we've seen a massive increase in green, social and sustainable bonds. And these are very interesting, because these are use-of-proceeds bonds which are actually focused on either developing green, renewable energies or they're in social housing. So they are very much focused and actually dealing with those longer-term structural issues that you can put in a bond issuance. And is very much policy orientated and that's going to give us a lot of opportunities to help and facilitate that transition.
EM: So a good point then, Josh, if I can ask you to be quite specific on where exactly you might see some of the opportunities, whether it's by sector or by region, and what precisely is your approach? As I said at the introduction, this is a highly diverse market. So how does one go about it? We heard Julia from Citi saying, unfortunately, many investors are taking an index-like approach to the region.
JC: Well, as I mentioned at the beginning, when we consider the nature or the uncertainty around things like geopolitics, I think that’s a risky way of doing things, because what's large now may not be as large in the future. I was looking at one of the countries in the region literally just then and looking at who the richest top ten were and how much that has changed over the last 20 years, and the industries they're involved in. So I do think that is quite dangerous. But let me touch on one that I think is quite an interesting one around this and particularly bringing in sustainability. I think for those people who are listening from Europe, everyone's into sustainability, I understand it's been part of part of the framework for a long time. If I talk to some US clients, they're a little bit less worried about it. And until recently, everyone in Asia is like, “’E’, ‘S’, what?”. I think this is important because as I will say to even the clients that are not as interested in it as maybe some of the European clients, if we say look at Europe and say this is pretty well known, the really good operating companies have high premiums. The ones that are bad companies have lower premiums. The impact has been and the regulations gone in. That is not the case in Asia. We are just starting this. The regulations are happening now, whether it's around pollution, water usage, what you need to do. And what that means is it impacts the profit and the growth outlooks for these companies. So whether you're a big believer in this or not, now it's impacting the profits, it's impacting the valuations. You're going to make money out of it, right, now that might not last forever. And over ten years, like Europe, that may be reflected in the market. But for now, it's an interesting opportunity. A very quick example of this: we bought an Australian oil services company. Now, at first people are like ‘this is a bad company’. It is in the oil and gas industry, so they're sort of getting de-rated. And when we looked at it, we said here's the company has an interesting skill set, some very, highly skilled engineers. They're starting to do a lot of work in things like carbon capture or building the things that go into offshore wind farms or all these type of areas. These are very complex engineering problems, often more so than in traditional oil and gas. And now we're at a situation where 50% of their backlog is all renewable or carbon-capture type technologies. Everyone's decided ‘oh, that's actually a pretty good company’. Now, it's green and environmentally friendly or whatever else. It has a big, better growth opportunities and attracts a higher margin. These are the opportunities that we see and that we're really trying to look out for. It's that delta that makes a difference.
EM: Thu Ha, where are the opportunities that you are pursuing? You mentioned the ESG bonds.
THC: The issuance there, the statistics were showing that nearly 1 in 4 bonds were in this kind of use-of-proceeds category, whether it's green or sustainability. And this year, we're hoping to see from Japan and Singapore a transition bond. So again, I think the way that the region is taking the sustainability is much more pragmatic. We spent a lot of time with regulators and stuff like that too, and the question isn't so much ideological like it is here, or maybe in the US. So we need to move into cleaner energy. We need: how do we do it? How do we get the funding to do it? And how do these, a lot of these use-of-proceeds bonds are actually very much saying that we need to do something, we need to put some money and to create the infrastructure. So it's a much more pragmatic approach, which I really enjoy working with, as what Josh was saying, we're beginning that journey. Robeco has really put foots on the ground. We have 4 specialists there, just talking, engaging, and at this early stage, to be able to influence the framework and to make sure that what we've learnt elsewhere is put into place. So definitely exciting times for us.
EM: Talking about exciting times, Thu Ha, your final words. What is the message you would want investors and listeners to know about the Asia-Pacific region? What makes you passionate about being based in Singapore and investing in the region?
THC: Having spent 15 years in Europe and the last 12 in Singapore, I think you have to go beyond the headlines. Simply the headlines do not give the nuance of the story. And unfortunately, too often we do that, and as it is a diverse region, it has got some really good fundamentals. Are we going to have some hiccups to get there? Yes. And that volatility provides good opportunities for entering into that. And you have to be bottom up. You have to kind of do the homework. It's just not a one size fits all. And you cannot describe such a vast region in one simple characteristic.
EM: Joshua, your final words on the outlook, the prospect, the great opportunity here.
JC: My point would be, at first, most people listening is probably investors and this is a profit opportunity because the last time we saw valuations this low and the last time we saw a valuation gap this large, when things did bottom up and start to improve, Asia outperformed by over 100%. So you have to think things are a lot different this time around or want to give up on those sort of opportunities. So, as rate hikes come to an end, as stimulus comes through, there's still a lot of lot of the production around the world, a lot of that stimulus money will find its way here at very, very cheap valuations. Don't get too tied up around geopolitics. These things tend, as we all hope, not to get as bad as what people think. But even if they do stay in this sort of stalemate situation, there is the 681 million people in Asia, and I told you about this, the world's largest population in India. That's all part of Asia as well. Don't miss out on this opportunity. And geopolitics can improve. It is possible.
EM: There you go. Some compelling and strong points from Joshua Crabb and Thu Ha Chow. Thanks for joining us. And I should add that none of this discussion is investment advice. To listeners, thanks for listening along. If you've enjoyed the show, please subscribe and rate the Robeco podcast. All our podcasts are available on your favorite podcast platform as well as on the Robeco website. Look out for our new bi-weekly podcast ‘In tune with the markets’, which keeps you updated on market developments with a musical twist.
Voice: Thanks for joining this Robeco podcast. Please tune in next time as well. Important information. This publication is intended for professional investors. The podcast was brought to you by Robeco and in the US by Robeco Institutional Asset Management US Inc, a Delaware corporation as well as an investment advisor registered with the U.S. Securities and Exchange Commission. Robeco Institutional Asset Management US is a wholly owned subsidiary of ORIX Corporation Europe N.V., a Dutch investment management firm located in Rotterdam, the Netherlands. Robeco Institutional Asset Management B.V. has a license as manager of UCITS and AIFS for the Netherlands Authority for the Financial Markets in Amsterdam.
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