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Mary Manning
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Portfolio Manager at Ellerston Capital Limited

Investing in Asia in 2019

Friday, January 11, 2019

Asian markets grinded lower for most of 2018 with the MSCI Asia ex Japan Index (USD) falling 22% from its January high to the middle of December. 

Our analysis of past market corrections in Asia suggests that this sell off is likely closer to the end than the start. As such, we enter 2019 with cautious optimism of a better year for Asian markets. 

Two key events to monitor for Asian markets in 2019 will be the outcome of the trade war and the direction of interest rates in the US. 

On the trade war, the meeting between Donald Trump and Xi Jinping at the G20 summit on December 1 seemed to increase the likelihood of a negotiated outcome. However, the subsequent arrest of Huawei’s CFO in Canada over alleged violations of US sanctions on Iran has again escalated US/China tensions and complicated ongoing trade negotiations. 

We do not expect the Huawei issue will go away quickly, which means the supply chain stocks could remain under pressure for the foreseeable future. So while we like technology as a sector, our preference heading into 2019 is in the China internet names such as Baidu, Alibaba and Tencent rather than tech hardware companies. 

On US monetary policy, the recent comments by Chairman Powell that US rates are “just below” the neutral level could provide a supportive backdrop for many Asian markets in 2019. That’s because Emerging Markets as an asset class typically outperforms during periods of slowing/falling US interest rates and a depreciating US dollar. We have recently added stocks in current account deficit countries such as Indonesia and the Philippines to position for this outcome. 

India is another country that could benefit from a more dovish US monetary policy. India has been an overweight for Ellerston Asia since inception and continues to provide attractive opportunities as it is the fastest growing major economy in the world. Stocks we like in India are Larsen & Toubro, Jubilant Foodworks, Reliance Industries and Hindustan Unilever. 

This article was originally published in the Switzer Report's Investment Outlook for 2019. Sign up today to access the full report.

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The best market in the world on a 10-year view

Thursday, March 08, 2018

In the next 10 years India is going to become a global economic powerhouse. This bodes very well for the Indian equity market. Consider the following:

1. SIZE

India is becoming too big to ignore. India is currently the 3rd largest economy in the world in PPP terms after China and the United States. Most Australian investors have exposure to US markets and an increasing number have exposure to China, either directly or indirectly. But how many have exposure to India? Very few.  

2. DEMOGRAPHICS

India has one of the best demographic profiles in the world. India currently accounts for approximately 18% of the world’s population and will overtake China as the world’s most populous country by 2030. In addition to the sheer size of the Indian population, the demographic distribution is very attractive. Approximately 65% of India’s 1.25 billion people are under the age of 35. This translates into a huge and rising middle class which will drive sectors like consumer and financials.

3. GROWTH PROFILE

India’s GDP growth in the last quarter was 7.2%. This is more than 2.5 times higher than Australian GDP growth and significantly higher than average GDP growth in Asia and other emerging markets. The good news is that this high GDP growth is translating into earnings growth. The average EPS growth expected for the SENSEX Index in the next fiscal year is 25%. This is 5 times higher than the rate of growth expected for the ASX 200.

Since Australia is a low growth country and has been for some time, many investors have forgotten the power of compounding growth as a driver for stock returns. Consider the following example: an Australian company and an Indian company both have $1 of EPS today and are both trading at 10x PE. The domestic company is growing at 3% per year and the Indian company is growing at 25% year. In 5 years, the Australian company will have $1.16 of EPS but the Indian company will have a whopping $3.05 of EPS. If there is no multiple expansion or contraction for either company, the Indian stock will have outperformed the domestic stock by 163% over 5 years. This compounding growth effect is why we love high growth companies in India.   

4. MODI'S REFORM INITIATIVES

In the last 2 years, Prime Minister Modi has devised and executed an incredible number of major policy initiatives. These include: demonetization, implementation of the GST, a state owned bank recapitalization, Housing for All, Make in India and the Mega Road Plan (Bharatmala).

The macroeconomic implications of these policies have long term implications, particularly the GST which will drive productivity gains for years to come. Given current state election outcomes and his approval rating, Modi is on track to return to power in the 2019 General Election in India. We look forward to seeing what he can accomplish in a second term.

5. IS INDIA AN "EXPENSIVE" MARKET?

This is a common pushback to the bull case for India. Yes, India is a high PE market but, as discussed above, it is also a high growth market. A Price to Earnings Growth ratio, or PEG ratio, is valuation metric that incorporates growth. The PE of the SENSEX is 18x but EPS growth is 25% for a PEG ratio of 0.7x. In Australia, the PE of the ASX 200 is lower at 15x but growth is way lower at 5% so the PEG ratio is approximately 3x. On this metric, India is downright cheap!

6. STOCK PICKS IN INDIA

Ellerston Asian Investments (EAI) is overweight India within our overall Asia portfolio and has been since inception. A few of the stocks we like are Larsen & Toubro (the largest infrastructure company in India), Maruti Suzuki (the largest car company in India), HDFC (the dominant housing finance company), Hindustan Unilever (consumer staples) and Mahindra & Mahindra (tractors, a play on growth in rural India).

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