26 May 2023
Want to find out more? View the RSMR Factsheet here:
Invesco Asia Trust plc
Invesco Asian Fund (UK)
Invesco China Equity Fund (UK)
A contrarian investor is an independent thinker who cares about the price they pay for an investment. They don’t mind going against the market trends and sentiments, and typically buy assets that are currently out of favour, while selling those that are popular.
“When you buy businesses or industries that are currently facing temporary challenges, you increase the odds of buying them for much less than they’re worth,” says Fiona Yang, a fund manager for Asian and Emerging Markets Equities at Invesco. “You can mitigate downside risks by ensuring corporate balance sheets are healthy, but the upside risk of capturing emerging trends or turnaround stories before others do can be very rewarding.”
Having successfully invested in Asia and emerging markets for decades, her team believe the region to have some of the most exciting investment opportunities in the world. While some names have become familiar, like Samsung Electronics, Alibaba and Tencent, there are myriad of lesser known but compelling businesses to choose from in the region.
It’s about getting value for your money
“Valuation is our number one priority when considering an investment,” Fiona says. “This can be a confusing thing to explain to an investor – that a good entry point might be when negative news is high.”
But just like buying branded clothing when it’s on sale, this doesn’t mean the team invest in bad companies. Quite the contrary – they simply acknowledge that companies go through cycles, and human psychology or emotion can push the market into overly negative territory, where perception is a far cry from reality. In other words: markets are often irrational, and herd mentality can cause assets to be mispriced.
Being a contrarian investor requires patience and a willingness to go against the prevailing wisdom of the market. They also need a deep understanding of the market, the specific asset, and the underlying fundamentals.
“We do the fundamental work and speak with company management to gauge where consensus is wrong,” Fiona says. “This gives us the confidence to lean into this perceived risk and buy mispriced assets. The other side of the same coin is to avoid expensive assets during periods of euphoria.”
The more complex and unpredictable the market backdrop, the more volatile and favourable the environment can be for contrarian investors. This is what makes Asia and emerging markets such a particularly fertile hunting ground for them.
Another investment factor that differentiates Asia is where it is in its economic cycle. Inflation in Asia is at its lowest in economic history compared to the developed world. Despite being used to dealing with inflation, they aren’t facing the same pressures of the US and Europe this time around.
This makes the potential downside risk from excessive tightening of monetary policy particularly low, leaving China and other Asian countries room to enjoy a period of acceleration in growth from trough levels.
The abandonment of China’s Zero Covid Policy, its support for the property sector, as well as the policy shift to ‘pro-growth’ signalled at the annual Central Economic Work Conference in December were some of the main reasons behind China’s market strength earlier this year. Reassuringly, China’s household savings ratio is at its highest level in a decade. This bodes well for consumer spending as confidence is restored.
Investing in Asia beyond China
“While China is our largest geographical allocation for many of our portfolios, there are plenty of exciting companies beyond Asia,” says Fiona.
Over the years, different geographies have served the team’s portfolios well. They have tapped into countries such as South Korea, Hong Kong, Taiwan, Indonesia, and opportunistically, Australia. Their investment horizon is vast and flexible as they can invest in all sectors, themes, and large and smaller companies.
That flexibility has paid off for the team coming out of Covid, when turnover of holdings was greatest to maximise the opportunities available – especially in cyclicals. Meanwhile, they took profits in popular areas such as India.
“2022 will be remembered for the extreme negativity surrounding China,” Fiona adds. “As contrarian investors, we took advantage of the volatility in the market, increasing our active exposure to China over the course of 18 months.”
Leaning into risk proved prescient. Many of these investments are expected to continue to benefit from the opening of retail and a rise in consumer demand. Economically sensitive companies have recovered from their lows but weakness in autos and the semiconductor sector in Korea and Taiwan proved to be an invitation to unearth possible undervalued opportunities there.
“After a long period of travel restrictions, one of the most valuable exercises we’ve been able to reinstate is on the ground meetings with companies we invest in but also those we are keen to explore,” Fiona notes. “A recent example is a trip to Jakarta, where the 2024 election and the national drive to grow Electric Vehicles (EV) ecosystem were hot topics for discussion.”
She travelled there with Ian Hargreaves, Co-Head of the Asian and Emerging Markets equities team, and met with some very exciting entrepreneurs in the EV and fintech industries. It’s an extremely competitive sector, so a selective approach and an in-depth understanding of the whole supply chain was required.
While Indonesia has one of the most vibrant digital ecosystems in southeast Asia, with its largest internet companies having enjoyed meaningful growth in recent years, the team do see some near-term challenges. They note that some internet companies may look to raise capital, given that cash levels on their balance sheets, and e-commerce companies would likely see a decline in gross merchandise value as free shipping and discount coupons are withdrawn.
Ian has grounds for optimism though. “Given the improved governance and risk management of the largest bank in Indonesia, Bank Negara, and busy retail areas,” he says, “the vibrancy of the economy and the reforms of Joko Widodo’s administration left us confident on Indonesia’s long-term prospects.”
Investors need to consider many things when investing in Asia or emerging markets. While becoming hotbeds of consumption and innovation following decades of rapid industrialisation, one must still be mindful of geopolitical risks and the global economic cycle – think trade and exports.
But as economies such as China re-open and governments across the region get behind industry with pro-growth reforms and supporting measures, we are optimistic about what the region can offer investors.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Investors in less developed countries should be prepared to accept significantly large fluctuations in value.
Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.
Important information
All information as at 30 April 2023 unless otherwise stated.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This communication is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.