- There is a huge amount of disruption in Asia, the world’s growth engine, but this also means that there is a huge amount of opportunity for investors
- Over the long-term, Asian equities have had the capacity to generate a higher return than other markets
- The relevance of the information technology sector in Asia has grown considerably in the last two decades, and now represents a 26% of the benchmark index
- Tailwinds for Asia, in terms of population growth and demographics are very powerful. The US and Europe are losing ground to China and India
According to Andrew Gillan, Head of Asia ex Japan Equities at Janus Henderson Investors, there is a huge amount of disruption in Asia, the world’s growth engine, but this also means that there is a huge amount of opportunity for investors. Gillan, who is based in Singapore and has an extended on the ground experience, explains that the main rationale to invest in Asian equities is that, over the long-term, Asian equities have had the capacity to generate a higher return than other markets. Even through the Asian Crisis in the late 90s and through the 2008 Financial Crisis, the MSCI AC Asia Pacific Ex Japan Index has generated greater returns than the MSCI AC World Index, obtaining 8,1% of annualized gross returns vs 7,4%, from December 1987 to August 2018.
The relevance of Asia in technology and disruption
With a population of 1.4 billion of people, China has 772 million of internet users (55% of the population); 717 million of smartphone users (51%); 753 million of mobile internet users (53%) and 527 million of mobile payment users (37%). Meanwhile, in the US, with a population substantially smaller and a higher percentage of internet, smartphones and mobile internet users, there is less room for potential growth.
“The relevance of the information technology sector in Asia has grown considerably in the last two decades, and now represents a 26% of the benchmark index. Meanwhile, Financials, that right now comprise about 32% of the index, are very susceptible to disruption. In ten years, they will probably have a lower weight. Tactically, our strategies are overweighting Financials now, in part because the Fed is rising interest rates, but from a long-term structural perspective, we have been underweighting Financials when investing in Asia”, says Andrew Gillan.
“In terms of allocating geographically to the region, I could say that we have already started Asia’s century. Tailwinds for Asia, in terms of population growth and demographics are very powerful. The US and Europe are losing ground to China and India. By 2030, Asia is expected to make up to 66% of the world's middle-class population, a powerful reason for accessing the consumer in these markets.
Another matter that is worth highlighting is the effect of the online grocery markets on bricks and mortar retail sector. China’s online grocery market is expected to reach 30 billion USD this year. This market has been growing at an annual rate of 73% over the last six years”, he adds.
The Janus Henderson Asia Pacific Capital Growth fund is a truly active strategy, investing only in 40 companies or less. It does not have an overwhelming style bias, mixing quality and value stocks, and its is liquid, the volume of asset under management allows the portfolio management team to be nimble in their investment decisions.
“About 70% of the stocks in the portfolio are considered core companies, with superior and consistent return on equity and cash generation ratios and with very strong franchises, for example: Alibaba or Tencent. The other 30% is the dynamic part of the portfolio, those are the stocks that we believe give us a good positioning to navigate markets. We hold positions in companies that we consider to be disruptive or adapters to the industry changes, or if we think that market conditions are changing in the short-term, we focus on companies that have a compelling valuation or are cyclicals”, explains Andrew Gillan.
Janus Henderson’s team embraces disruption in investment decisions. They define disruption as an entirely new product, service, or process that creates significant incremental value over the long term. They do not limit it to the Artificial Intelligence or the Technology sector, but they extended it to traditional sectors, like consumer, insurance, banking and IT services.
“We normally identify the disruption potential in companies through the leading indicators of potential disruption. These may be a visionary leader or a management team that is willing to change an existing ecosystem or trying to challenge a different business model. It can also be the “right” corporate culture, a track record of innovation, a good long-term strategy and vision, strong financials to organically fund required investments, or strategic and timely mergers and acquisitions. We believe that successful disruption will lead to high and sustainable return on equity over the long-term”, he says.
“Similarly, if we apply the same disruption potential to our investment process, we can say that we assess the management, financial and franchise quality. Additionally, we have frequent interactions with the companies that we invest in, something that we think is the key way to identify and look for the impact of disruption on investments. We are probably more quality investors rather than disruption investors, as we believe that quality companies have higher chances of becoming disruptors or being protected from disruptions”.
Not all disruption is profitable
Clearly, not all disruption is profitable. More than 40 bike-sharing service companies have sprouted in China since 2016, because it is a business with very low barriers to entry. However, the bike-sharing market in China is undergoing a significant consolidation, with more than 20 start-ups going to bust as of February 2018.
“There are only going to be a few winners, and not surprisingly, they will be the companies that are backed by the “big guys”. That is the case of OFO, a company that secured 866 million USD in a new round of financing led by Alibaba, or the case of Mobike, a company adquired by Meituan Dianping, China’s larger provider of on-demand online services, at a valuation of 3.7 billion USD. The companies with the bigger and deeper pockets become the winners”, he concludes.