Last Friday we co-hosted our first Asia Investment Opportunities Conference here in Hong Kong at the Mandarin Oriental hotel.
We were fortunate enough to have with us some incredibly well-respected authorities on Asian and global markets.
They included CLSA’s legendary research guru Chris Wood (author of the must-read institutional research letter “Greed & Fear”), and Morgan Stanley’s Jonathan Garner, Chief Asia and Emerging Equity Strategist and Head of Global Emerging Market Strategy.
Both revealed two of their top Asian equity market picks right now:
Pick #1: India
We recommended Indian equities in our February 2016 edition of The Churchouse Letter “The Last of the Seven Percenters”.
India had long been one of those “hated” markets… the kind that investors automatically recoil from.
Ask anyone who’s ever had business dealings in India about the bureaucratic issues they face and it’s likely you’ll be in for a long conversation.
The situation is beyond painful. Back in 2012, it was ranked the worst in Asia by PERC (a Hong Kong-based political and economic risk consultancy) in terms of bureaucracy. And, believe me, Asia has plenty of competition in that arena!
As an example, take Indian Railways, the state-owned company administering and managing India’s 41,000 miles of railway routes. (The circumference of planet earth is only 24,000 miles!)
It’s one of the world’s largest employers with 1.4 million employees – that’s 100,000 more than the Indian armed forces.
It took 18 months of decision-making to resolve the thorny issue of whether the mugs in the washrooms of second-class sleepers should be attached to the wall by chains or not, according to the Financial Times.
The legal system is even more laborious and labyrinthine. Court cases take years to get resolved.
But India, the largest democracy on the planet with just over 1.25 billion people, is an opportunity that can’t be ignored… an opportunity that continues to grow at around 7 percent annually.
Chris Wood described India’s current Prime Minister Narendra Modi as “the most impressive politician on the planet”.
We agree that he’s played a transformative role in helping address the litany of problems that have held back growth in India.
Chris is so bullish on India that his Asia ex-Japan thematic equity portfolio of Asia stocks (which he recommends for long-only absolute-return investors) is over 50 percent weighted towards India.
[Note: since 2002, this portfolio has outperformed the MSCI Asia ex-Japan index by an incredible 850 percent.]
Jonathan Garner, who just that morning had arrived from India and was sharing a presentation he’d given there the day before, was similarly bullish. He pointed to India’s high dividend yield and modest forward price-earnings multiple relative to the MSCI Emerging Markets Index in particular.
In other words, Indian equities are paying a relatively good cash flow and are priced attractively.
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Pick #2: China
Our most recent edition of The Churchouse Letter says it all… “We’re getting back into mainland China”.
We already had plenty of China recommendations in the portfolio, but we felt it was time to make a broad China equity market call.
In February of this year, Jonathan Garner’s team released a 100-page plus report simply entitled “Why we are bullish on China”.
One interesting chart he put up on the screen showed the percentage of private non-state owned enterprise (SOE) companies as measured in terms of MSCI China’s (the equity index) market cap.
It showed that in 2016 only 47 percent of MSCI China by market cap was private, with the 53 percent balance being SOEs. However, the forecast for 2020 (just three years away) sees 70 percent of the MSCI China market cap being private.
Private companies in China are typically less leveraged (i.e. carry less debt) and offer higher returns on equity than their state-owned brethren. We thought this was a bullish indicator for Chinese stocks and one that we had overlooked ourselves.
Chris is also recommending an overweight China position. He showed a good chart outlining the long-term positive correlation between Chinese GDP growth, and the Producer Price Index (PPI) inflation.
PPI measures the average changes in prices received by domestic producers for their output. And a positive correlation implies that when PPI increases, so does GDP.
As GDP growth is a lagging indicator, PPI growth can give us advance warning of strong economic growth – and that’s exactly what Chris’ chart suggested: Strong Chinese economic growth.
We recommend adding some exposure to both of these two key Asian heavyweight equity markets.
Subscribers to The Churchouse Letter will find our specific recommendations.
And even if you’re not a subscriber, there are a range of ETFs available. But please make sure you know exactly what you’re buying as, particularly when it comes to China, there are a lot of factors to consider (for example, A Shares versus H Shares, different underlying China equity indexes to choose from, costs, and liquidity).