03 May 2023
Jason Pidcock, Investment Manager, Asian Equity Income | Sam Konrad, Investment Manager
The Asia Pacific region is an incredibly diverse part of the world, encompassing a meaningful percentage of the total human population across countries and economies at virtually every point on the development spectrum. As investors in Asia Pacific equities, this diversity gives us a wealth of opportunities from which to choose.
To illustrate the breadth of the investment universe, let us consider the two countries with the largest weightings in the strategy: Australia and India.
We believe that Australia’s strong demographics, mature economy and long history as a free market have allowed a broad and deep base of businesses to flourish, and that market continues to thrive. It is home to many ‘best in class’ and well-governed companies with a history of solid dividend yields. Often, it seems as though investors look at Australia and think ‘commodities’, but there is much more to Australia than this.
Within Australia – in addition to three leading resources companies – our exposure includes financials in Macquarie and Suncorp, as well as companies in diverse other industries such as property, toll roads, and retail. One company we believe is especially worth highlighting is Amcor. This packaging company began life in Australia, but has long since outgrown its own backyard. Now a truly global business (with Australian operations accounting for only 2-3% of total revenues) that counts the likes of Nestle and Kraft Heinz among its clients, Amcor is a prime examples of an extremely well-run Australian business that is a true leader in its field. In a portfolio of Asia Pacific equities, we believe Australia deserves a place as a core component.
Whereas we believe Australia is the most exciting developed market in the Asia Pacific region, India is the most exciting emerging market. The two countries, and their respective economies, are obviously very different from each, but they bring complementary strengths that we believe helps us to capture the best the region can offer.
India’s huge, young population is a powerful driver of growth. While still clearly a developing country, be in no doubt that India is in many respects a cutting-edge digital economy, with the government enrolling more than 1.2 billion Indians in its biometric digital identity programme, Aadhaar, and bringing more than 10 million businesses onto a common digital platform.
Recent troubles in the US banking system, and the fall of Credit Suisse, have put the fragility of developed market banking systems in the spotlight. India went through a banking crisis of its own a few years ago, but now non-performing loans are at record low levels and banks in India are significantly more conservative and risk-averse than their developed market peers. With no shortage of deposits, they focus on the basics of banking: traditional, vanilla lending and credit analysis, with exposure to the riskier end of finance avoided entirely.
An example of an India bank we hold in our strategy is HDFC Bank. It’s currently the lowest-yielding stock in the strategy, but we’re happy to hold some positions for their total return potential providing adequate income contributions are being made from holdings elsewhere.
HDFC Bank is the largest private sector bank in India with more than 70 million customers and around 10% market share. It has 6,500 branches split 50/50 between urban and more rural areas. We see it as very well managed bank, with a strong balance sheet and Tier 1 capital adequacy ratio. The company has been able to grow fast over the past 5 years, and in our view that high growth should continue as the Indian economy and banking sector grows. The working age population in India is 928m, of which 463m are employed but only 26% of those are salaried, showing the potential growth from increased financial inclusion. We believe private sector banks such as HDFC Bank should continue to take market share from public sector banks in India.
The economic and geopolitical uncertainty in the world make this a challenging time for investors in any asset class, but we’re philosophical about the situation and feel comfortable to be focused on Asia Pacific equities. After all, just as farmers must endure occasional bad harvests, investors must endure occasional bear markets. But fundamentally we believe equities are a good place to be when inflation is high, provided you’re invested in companies that have pricing power, while the Asia Pacific region has the diversity of opportunity and a tailwind of secular growth trends that give us confidence for the medium and long-term outlook.
Holding examples are for illustrative purposes only and are not a recommendation to buy or sell.
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