Despite the MSCI India Index falling 16.7% over the past 12 months, Asian equity portfolio managers running funds reviewed by Morningstar generally believe government reform efforts have created attractive secular investment themes.
“The consensus among managers under our coverage is that the [Indian] economy is heading in the right direction, but the pace of improvement has been slower than expected, as some of the corporate governance issues are deeply rooted to the corruption-rife and bureaucratic business culture,” according the research firm’s February report on the Asian equities sector.
Selective sectors were of interest to the managers. One is the banking sector, specifically certain private banks that demonstrate sharp fiscal management. These select private banks are likely to have a competitive advantage against the public banks’ “deteriorating asset quality, lack of capital adequacy, and dominant deposit market share of approximately 70%”.
Another reform-linked theme that appeals to managers is infrastructure. The firm said exposure is typically done through derivative plays such as cement producers.
Managers also like the domestic consumption theme. India has favourable demographics with a relatively young population and slowly rising income levels. Managers buy into this theme through multinational consumer staple companies or through domestic consumer discretionary companies.
Portfolio managers generally shunned Malaysia and Australia because their economies are tied to commodity prices, which are rock-bottom.
“Given expensive valuations and the country’s unfavourable position as a net exporter of commodities, most managers that we met with disliked Malaysia,” the report said.
In Australia, high valuations and a currency devaluation are additional reasons to avoid investments, managers said.
Asian equities plunge
Asian ex-Japan equity funds have had a tough year. The sector fell 19% over the trailing twelve months, worse than the index, according to FE Advisory data.
Morningstar noted than in 2015, it downgraded five Asia equity funds: Templeton Asian Growth, Aberdeen Asia Pacific Equities, Stewart Investors Asia Pacific and Stewart Investors Asia Pacific Leaders and the L&G Pacific Index. Newton Asia Income was put under review.
Only two Asian equity funds were upgraded last year: the Schroder ISF Asian Opportunities and Robeco Asia Pacific Equities.
Asia ex-Japan index vs sector