Jupiter: Notes from the Investment Floor: Investing in Asia, but avoiding China

As an investor I’m mostly focused on identifying attractive businesses, and although I take into account the macroeconomic environment I try not to make future forecasts. It’s more about understanding the environment that economies and markets are operating in, including the geopolitical and national political backdrops, as well as the business environment, which over the longer term includes environmental risks too. This leads me to form opinions about the countries I consider investing in, and those that I choose to avoid.

China, for example, is somewhere I’ve become increasingly cautious about investing in. In Jupiter’s Asian Income strategy, we have just exited our last remaining position in a mainland Chinese company. Unsurprisingly, zero exposure to mainland China is quite unusual for an Asian strategy given that the Chinese market is the largest in the region, and its economy is also the biggest; however, I have far too many significant concerns about the political nature of the country, both domestically and in terms of its standing globally.

There remains significant state intervention in China, including in the Chinese economy, and I am not comfortable investing somewhere where the state can have such a huge influence. It is my firm view that over time China is likely to underperform as a result of this heavy intervention.

Furthermore, I expect to see greater friction in the future between the West and China, particularly after the US midterm elections in November. There is already a list of Chinese stocks that the US, and therefore other international investors, are not allowed to invest in, including Chinese telecom and tech companies; I believe that list is likely to grow and if it does I wouldn’t want to be forced to divest at the same time as everyone else.

Our Asian Income strategy does, however, still have plenty of exposure to China’s economy through successful businesses located elsewhere in the region that sell to China – this is my preferred way to play China’s economy. This exposure comes from companies based in countries like Taiwan, Korea, Australia and Singapore.

In stark contrast with China, Australia for me looks like the best country for investment over the medium and long term, not only in the Asia Pacific region, but globally. I view it like a smaller version of the US, with a similar federal political system, a functioning democracy, free press, and a productive workforce. However, unlike the US, there’s better social cohesion and less social unrest. It has a lower government debt to GDP ratio, at 50%, and it is able to retain the highest AAA credit rating for its government bonds.

Australia is a land of oligopolies – in many sectors you’ll find a small number of very strong companies that between them have a very high market share and are able to bat off attempts from other companies to break into those oligopolies because they’re so well managed. Moreover, it’s a “professionally managed” economy as a whole – by which I mean there are virtually no state-owned enterprises in Australia; you certainly won’t find any large listed ones there. Companies are well managed too, with strong corporate governance, and I believe Australia faces far fewer longer-term environmental risks there than many other countries do in the region, and globally.

As well as looking at risks and opportunities on a country level, at a stock-picking level I look for companies that I believe would survive a recession, and there’s balance sheet strength across the holdings in the strategy. I like companies to have low levels of debt, although the more visibility there is on cashflows and earnings the more comfortable I am with debt on the balance sheet; the less visibility, the more robust the balance sheet needs to be for me to consider investing. In terms of additional key attributes, I look for companies with strong pricing power, resilience in a changing political environment and good liquidity.

Fund specific risks

The Jupiter Asian Income Fund invests a significant portion of the portfolio in emerging markets, which carry increased liquidity and volatility risks. This fund invests mainly in shares and it is likely to experience fluctuations in price which are larger than funds that invest only in bonds and/or cash. Quarterly income payments will fluctuate. All of the fund’s expenses are charged to capital, which can reduce the potential for capital growth. The Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request.

The value of active minds: independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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