"China is not the only game in town": abrdn's Cheong on Asian investing
I recently sat down with abrdn’s Head of Equities - Asia Pacific, Flavia Cheong, for her insights into what is happening in the Asia-Pacific region.
Flavia is in town to promote the launch of the abrdn Sustainable Asian Opportunities Active ETF (Managed Fund) (ASX:ASAO), which launched this week and offers investors quick and easy access to the region’s dynamic growth potential.
Same macro, different view
Starting with the macro environment, Cheong is concerned about what everyone else is - high inflation and the possibility of a US recession. She is also keeping a close eye on what’s happening with COVID and its implications for growth in the world's most populous region.
When it comes to a potential US recession, Cheong is mindful of the global impact but also encouraged by what she is seeing across the region;
The implications for Asia-Pac is that the US is a global economic powerhouse and it will slow growth. But on the other hand, you have seen a rise in regional traits within APAC and that should help somewhat in terms of a more measured slowdown.
Cheong also highlights the fact that around the region, there have been substantial lockdowns since the onset of COVID, and certain geographies are still opening up, which will provide tailwinds moving forward.
"Tokyo just reopened in October. Singapore really only reopened in May. Thailand is going through the process. China has not yet reopened. But when China actually reopens, we think probably by the second half of next year (that's always a moving target), that should actually provide substantial impetus to growth to the region" says Cheong.
The rising opportunities within APAC
'Don't forget that the Asia-Pacific is far more than just China' is the sentiment that Cheong imparts when asking about opportunities throughout the region.
“India has 1.4 billion in terms of population. A third of the population is below the age of 18, and they have a net one increase in the population head count every six seconds. And we are expecting that by 2026, India will surpass China in terms of population. So the demographics in India are substantial and there are huge opportunities", says Cheong.
Cheong adds that India is a services powerhouse. “India doesn’t play on the theme of cheap manufacturing because cheap manufacturing is not sustainable over a period of time, as you've seen with China.” The services capability that India has built has largely been driven by the level of education within India adds Cheong, “that's why they're able to be a net exporter of services as opposed to manufactured goods”.
Finally, Cheong points out that 70% of the Indian economy is driven by domestic demand and not exports. Subsequently, it’s a much more insulated investment opportunity when considering the possibility of a global recession
As for Indonesia, it has similar demographics to India – one-third of the 275 million population is below 18. “So when you think about these demographics, you shouldn't think of APAC as just China because it's a much more diverse region and there are immense opportunities”, says Cheong.
In the developed economies of the Asia-Pacific, Cheong highlights Taiwan saying that “while the demographics are not as interesting as China, India, or Indonesia, you can find global globally competitive companies”.
Overweight and underweight
When it comes to how Cheong thinks about the region's assets, she is overweight Southeast Asia and, in particular, “substantially overweight” Southeast Asian banks. She notes that in a rising rate environment, banks have been beneficiaries via rising net interest margins. They are also coming out of lockdowns, which has provided them with an opportunity to shore up their balance sheets. Cheong also notes that bad debts are still well in control; “So if you look at NPLs (non-performing loans), they are below 3%, they're very well covered, provisions are very conservative, and they're seeing a return in demand for loans.”
The stock Cheong particularly likes in the space is Bank Central Asia, which is the largest private bank in Indonesia. “It has about 29 million accounts and 1,300 branches. The reach that they have in terms of the distribution network is substantial. Their CASA is about 71% of its funding base. So very sticky”, says Cheong.
As for where she is underweight, Cheong highlights Chinese real estate and banks.
“We've long held an underweight to China real estate mainly because it's very much driven by land sales and it's a high asset turnover business. I don't particularly like the high asset turnover business because you're very reliant on sales to be able to recycle the cash to be able to buy land".
Cheong adds that leaves companies very vulnerable if they don't have very strong balance sheets. And that is one of the reasons why we've seen the issues with property companies or real estate developers in China over the last two years - over-leveraged balance sheets. "That's great when you're going to a bubble, but it's not that great when you're coming out of one and that's what you're seeing now", says Cheong.
China, a tale of two cities
Whilst Cheong is underweight Chinese property and banks, that does not mean she is underweight in all Chinese assets.
Cheong is overweight within domestic China, “because I think domestic China is where you have a very rich opportunity set”, says Cheong.
When talking about the Chinese market, Cheong notes the difference between the offshore market, with companies listed in the US and Hong Kong, versus the A-shares market. In the offshore market is where Cheong is underweight, noting that:
“it’s very old economy. It's some tech companies, internet companies, it’s real estate, it's industrials, it's banks - it's dull. It’s not about playing China into the next 10 years."
In the A-share market is where Cheong prefers to play. Employing a team of eight analysts looking solely at the A-share market, the abrdn team is able to do significant amounts of research to hunt down the best opportunities.
“With the A-shares market you have huge diversity and a lot of that plays on the thematics that we like in China, whether you're talking about green, you talk about rising aspirations and influence, domestic technology, etc. You get that richness within the domestic market and that's where we're overweight.
One of the big opportunities that Cheong is seeing is around the adoption of ESG throughout APAC. She is quick to acknowledge that Australia leads the region in terms of how companies think about sustainability and the financial risk implications.
Rather than it being a headwind or a case of increased costs, Cheong is seeing the positives around further ESG adoption throughout APAC.
“What you're seeing in Asia now is that there is an increasing impetus to focus around ESG, and I think that's going to drive positive re-ratings going forward”.
The pick of the bunch
When asked for one stock that stands out in the portfolio, Cheong highlights the life insurance company AIA, which is listed in Hong Kong. And whilst even Cheong admits that it’s not the spiciest story going around, it’s a great business.
“It was established in 1919 in Shanghai. It's in 18 markets, but when you break down the business, 1/3 of that sits in Southeast Asia. So Singapore, Malaysia, and Thailand account for 1/3 of operating profit after tax and new business value. China and Hong Kong account for another 50%. So it's a very nice Pan-Asian play”.
Cheong points out that it has 40 million policyholders and 17 million members in group policies. “So a huge base. It's got a great back book, it's got surplus cash of US$25 billion, and just this year, it announced that it would do a buyback over three years of US$10 billion”.
AIA is a play on health and wellness according to Cheong, and it plays into the aspirations and rising influence in China. “And I believe that it's a company that's probably less talked about than some of the spicier stories that you see elsewhere”.
Access Asia in one click
The abrdn Sustainable Asian Opportunities Active ETF (Managed Fund) ASX:ASAO, launched on the ASX yesterday and invests primarily in a concentrated portfolio of around 35-70 Asian (excluding Japan) listed securities with the potential for capital growth and increased earning potential. Learn more
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