By Morgan Davies
GREATER CHINA: HANFENG WANG, CICC
Investors with money in China in 2016 and 2017 were probably wowed by the performance of new economy stocks, such as healthcare and consumer goods, in the country. But 2018 has brought nothing but disappointment and underperformance for shareholders.
“Many investors wonder whether this is a short-term, cyclical underperformance,” says Hanfeng Wang of CICC, top strategist for Greater China in the Asiamoney Brokers Poll 2018.
Wang has been in the industry since 2005 and has been chief strategist at CICC since 2013. Today, he runs a team of eight covering Greater China, with reports written in both English and Chinese.
“We still believe that China is trying to transition the economy from the older model to a newer model,” Wang tells Asiamoney.
Growth slowed in 2018 because of the trade war with the US and global market friction, but a market correction will provide opportunities for long-term investors, he says. Chinese policy is always a big factor in market developments, and in 2018 China’s deleveraging proved important.
“People may continue to talk about the potential impact of a possibly more significant slowdown of the Chinese economy,” says Wang.
The trade war will continue to be a theme in 2019, with the potential to spill over into other sectors of the economy. The Chinese property sector has cooled off quickly already, without the help of the trade war.
The contraction of valuations in China may serve as a red flag for investors, but in the long run, sectors including tech, consumer goods and healthcare are still well positioned to benefit from China’s regulatory reform, says Wang.
The healthcare sector, for example, is expected to have earnings growth of between 15% and 20% in 2019.
The government will also continue to pour money into infrastructure, boosting that sector as well.
China’s opening up to outsiders is leading to drastic changes in its economy, and will continue to do so in the coming years. Wang sees more investors visiting China and developing a better understanding of a market that just a couple of years ago they regarded as something of a black box.
“Foreign investors’ understanding of China, either the economy or the market, has improved quite significantly over the past years,” says Wang.
INDIA: SANJEEV PRASAD, KOTAK SECURITIES
Kotak Securities’ India strategist Sanjeev Prasad says that in the course of 24 years working in the financial services industry, he’s seen a lot.
“In India, every three months you have something new breaking out,” says Prasad, who has been a strategist for a decade.
The current concern is India’s non-banking finance companies, which face a liquidity crisis. The finance industry has been in turmoil, and India is dealing with a credit problem, something Prasad says he began writing about back in 2012.
India is one of several Asian countries that is due to hold general elections in 2019, and the outcome will determine the pace of economic reforms.
As for trends in the global economy, India must be prepared for higher interest rates and a rise in oil prices, says Prasad.
Oil prices will be very relevant for the Indian stock market in the coming months, as low oil prices help keep domestic retail auto fuel prices low. Any spike would become an election issue, and government-owned upstream oil and gas companies may be forced to contend with oil subsidies.
While other Asian governments are trying to position themselves to benefit from the US-China trade war by attracting manufacturing, India has lost out because of complex labour laws and the challenges of doing business in the country.
“That’s been a disappointing theme,” says Prasad of the lack of manufacturing moving to India. Companies are more attracted to southeast Asia for manufacturing, and any movement into India will be slow at best, he adds.
But Prasad and his team of 26 analysts have plenty to cover in India. The bank produces research on more than 200 companies, with between two and four analysts for each sector. As new sectors, such as insurance, emerge, Prasad’s team add them to their repertoire.
Because India has been open to outside investors for so long, the market is generally well understood, says Prasad. It’s the smaller stocks and emerging companies that need more research.
“India’s not a market where people are still discovering themes,” says Prasad. “It’s a well-researched market.”
As for the best market performers in 2019, Prasad recommends looking at the private-sector banks, especially the ones coming out of the corporate credit crisis.
INDONESIA: ADRIAN JOEZER, MANDIRI SEKURITAS
Adrian Joezer, Mandiri Sekuritas strategist, is no stranger to emerging market volatility. He has been an equity analyst for a decade, and a strategist for nearly two years, but even so, 2018 proved a tough year for the archipelagic nation.
“2018 was the year that investors were repricing the valuations in Indonesia amid the global yield repricing,” Joezer tells Asiamoney.
Economic growth slowed and the currency plummeted against the dollar during the year. Valuations still are not cheap, but they are lower than they were at the start of 2018. The forward price-to-earnings ratio was in the high teens in early 2018, but it is now in the mid-teens after the repricing, he explains. Most stocks are trading on lower multiples now relative to early 2018.
On the plus side, the decline in oil prices in the second half of the year has helped overall sentiment, says Joezer.
There are still plenty of opportunities for investors, and Joezer and his team of 11 analysts covering the Indonesian capital markets are on the hunt for those offering the best value. “Indonesia is still a domestic-driven economy,” says Joezer, where consumption plays an important part in growth. “For foreign investors, the key is to estimate the trend of domestic consumption.”
The surprisingly strong third quarter showed investors that Indonesia was improving; yet many investors are cautious about the longer-term stability of this emerging market country. And the market is not cheap yet, adds Joezer.
Investors have been underweight Indonesia, even though many stocks trade below the five-year valuation. Continuing the trend in 2018, “our belief is that 2019 will be a stock-picking market,” says Joezer.
As in several other parts of Asia, Indonesia will hold a general election in 2019.
Foreign direct investments typically slump right before an election, so the government will be keen to push for more foreign attention as soon as the election is over, says Joezer.
“That will be a key source of growth,” he says, adding that the government has already been focusing on infrastructure investing.
KOREA: SO YEON PARK, KOREA INVESTMENT AND SECURITIES
South Korea was a very different story in 2018 than in 2017, thanks to the apparent thawing in the relationship between North and South Korea, and improving relations between the US and North Korea.
“In the past 20 years, the North Korea discount has been a major part of the Korean equity market discount,” says So Yeon Park, Korea Investment and Securities strategist.
Park has worked in the industry for 18 years, discovering a love of Asian securities after first trying out a career in journalism. She leads a four-person team, filtering the headline noise of geopolitics to understand the changes happening in their home market.
North Korea’s nuclear threats meant that South Korean equities traded at a discount, but the size of that discount is lessening thanks to improving relations.
Foreign investors have not yet changed their approach to South Korea, but as clearer steps toward a friendly Korean peninsula take shape, valuations will shift, says Park.
“The North Korea issue is going to affect the Korean equity market discount decreasing,” she says
At the same time, South Korea must watch China closely: many of its exports go via China before being exported to the US, but US-China trade tensions are affecting demand for these goods, and that could continue for some time.
“Korea’s economy is still very dependent on China,” says Park. “How China’s economy functions is a major variable.”
There are a variety of bright spots for South Korea’s stock market in 2019. Park’s top picks for the year include CJ Logistics, which will benefit from an upturn in parcel delivery rates following the minimum wage hike due to come into effect in 2019, and Semco, which is seeing surging demand for electronic devices. SK Innovation and SK Telecom are also top picks for Park.
MALAYSIA: IVY NG, CIMB INVESTMENT
The general election in Malaysia in 2018 produced shock results.
“For the first time in more than 60 years, the country has seen a change in the government,” says Ivy Ng, strategist at CIMB Investment, “and there are many changes that are going on in Malaysia to improve transparency and governance in the long term.”
Ng’s career began in 1994 at Hwang-DBS Securities, when she was fresh out of school; she was made head of research at CIMB in 2016, and in addition to her role as strategist for Malaysia, Ng also covers plantations.
“With commodities you have the price cycles, and I’ve gone through a few bear and bull cycles,” says Ng. Her coverage of the palm oil industry, work she has been doing since 1996, has proved particularly interesting, as demand has shifted over the years, and sustainability has become a recent focus.
In 2019, the government’s impact on the domestic market will continue to be a theme, as well as the US-China trade war and rising rates globally, says Ng.
At this point, CIMB recommends that investors position themselves defensively and invest in stocks that will not be impacted by uncertain government policies. Top picks include Gas Malaysia, KPJ Healthcare and Kossan Rubber Industries.
Even though the new government has been in power for more than six months, analysts and investors have plenty of questions about policy.
“The subsequent policy measures that have been taken by the new government have surprised some of the participants, and have resulted in volatility in some of the sectors in Malaysia,” says Ng.
The government’s decision to cancel, defer or reduce some big projects that the previous government had planned has hit contractors hard. For instance, Malaysia has stalled the development of the RM55 billion ($13.2 billion) East Coast Rail Link, and cancelled the RM9.4 billion Multi-Product Pipeline and the Trans-Sabah Gas Pipeline, she points out. The high-speed rail project to connect to Singapore has also been deferred.
THE PHILIPPINES: ALFRED DY, CLSA
Investor interest in the Philippines is on the rise. While there were only a handful of companies for analysts to look at 15 years ago, the country’s economic turnaround and long-term growth potential have drawn the attention of foreign investors.
“The Philippines has had a good run since 2004,” says Alfred Dy, top strategist at CLSA. “There are definitely more clients looking at the market.”
Dy, who has served as head of research and market strategist since 2004, and his team cover 45 companies in the Philippines market.
“Our approach is really focused on company fundamentals,” he says, pointing to his team’s style of deep analysis and approach to macro events from the bottom up.
“We try to offer as much as possible,” he says, adding that he also does a lot of bespoke research for clients.
The Philippines has not escaped the emerging market turmoil of the past year, as a result of global volatility and domestic issues such as the central bank’s initial reluctance to raise interest rates at the start of the year. The Philippines has suffered net outflows of about $1.6 billion, says Dy.
“At this level, the market is basically down 20% from the peak,” in late January.
But Dy is relatively optimistic about prospects for the market in 2019.
“We’re seeing some long-term investors start looking at the market again,” he says. “They’re not buying in a big way yet, but they’re beginning to take a look at the Philippines again, which is a good sign going into 2019.
“As we enter 2019, Philippine companies are probably OK. They’re in a good position, but we really need to see a favourable global macro backdrop.”
Should there be a peaceful resolution to the US-China trade war, and the US refrains from large interest rate hikes while oil prices remain low, the Philippine stock market will be set for an “OK” 2019, says Dy, adding that the key sectors to invest in include conglomerates, banks, property and consumer goods.
As in other parts of Asia, the recent drop in oil prices is creating some more optimism.
“The Philippines, among Asian countries, is one of the biggest beneficiaries of the drop in oil prices,” says Dy.
Mid-term elections in 2019 may also give investors greater clarity on government initiatives such as infrastructure spending.
SINGAPORE: PATRICK YAU, CITI
For a strategist, Singapore is unlike any other country in Asia; the financial hub’s dependency on its neighbours means it cannot be covered or analyzed in isolation. Patrick Yau and his team of analysts at Citi work not only from Singapore, but from Malaysia and Hong Kong as well.
“Singapore has an inside-looking-out perspective,” says Yau, pointing to the city-state’s limited domestic investor pool. “It’s a very different model for the companies that are operating in Singapore.”
Yau, who has been at Citi for eight years and in the industry for more than two decades, oversees a team of seven across Singapore, Malaysia and Hong Kong, covering about 60 Singaporean stocks. At the same time, Yau also heads up Malaysian coverage, as Singapore’s economy is tied particularly closely to that of its neighbour.
The ability to spot trends and sensitivities across the two countries lends itself to better strategies, says Yau.
“The investment world is not siloed,” he says. “It’s a globally connected world.”
Singapore had a rough 2018.
“It’s almost like a bear market,” says Yau. When asked what the biggest drivers of the negativity were this year, Yau is quick to say “everything”.
“In my 20-plus-year career, I’ve seen global crises,” says Yau. “What strikes me across these cycles is that some of these exercises take a few years to build up and investors are happy to go along up until the last point.
“Excesses are always building up somewhere,” he says, adding that they end up contributing to a correction or a crisis.
A year ago, investors had little concern about how the countries in Singapore’s neighbourhood were funding themselves. Now, trade and budget deficits make headlines every day. Sectors that did not seem to matter in the past have been thrown to the forefront of market worries, and local currencies are being battered.
“Trying to measure uncertainty, trying to put a number around that uncertainty, is how we do our job,” says Yau. “Our job is really about trying to price in risk.”
Singapore will hold a general election in 2019, and after the shock results in Malaysia in 2018, some analysts are reluctant to predict election outcomes in the region with any confidence.
“When a new government comes into power, it increases the complexity of uncertainty,” says Yau.
The theme of uncertainty and the ambiguity of risk premiums will resound into the new year.
“2019 could be a tale of two contrasting halves if the expectations cycle hits the bottom by the first half of the year,” says Yau.
In the meantime, he continues to favour lower beta names. Singapore Telecommunications (Singtel), he says, is attractive, as is CapitaLand and UOL.
“Developers are deeply discounted and actually are only lightly exposed to the residential segment in Singapore,” he adds.
TAIWAN: VINCENT CHEN, YUANTA SECURITIES
Technology is king in Taiwan. While most country strategists focus solely on strategy, Yuanta Securities’ Vincent Chen doubles his duties by covering the tech industry in Taiwan.
In his case, the dominance of the tech industry is a bonus.
“It probably gives me a bit better understanding of trends and the overall macro situation,” says Chen, who has been in the industry for nearly 20 years.
“Right now is critical timing,” says Chen. “The economic trend seems a bit unsure.”
With Taiwan’s economy so closely tied to tech exports, it seems likely that an economic slump is on the horizon.
“A good strategist, in my view, is trying to understand where we are in the stock market cycle,” he says.
Chen admits that he is quite bearish. If the trade war between the US and China continues, adding more tariffs on goods, it could be a disaster, says Chen.
“The supply chain can’t take the heat,” he says, “so consumer costs must be increased, and that affects demand.”
That means that there are few bright spots for tech. To cut costs, companies generally focus on legacy products, but consumers have little incentive to buy old products. That does not bode well for the stock market.
Chen says his biggest concern at the moment is the macroeconomic environment. Putting the trade war aside, global economies may be at their peak.
“The US-China tension is just accelerating the fall of the economy,” says Chen, pointing to the slump in iPhone sales as one example of the weakening tech sector. “The basic fundamental situation is not right.”
Chen points out that such trade tensions have not posed a global problem for many years.
A good strategist needs to relay that kind of information to investors without being too academic.
“They need to relate to the real financial behaviour,” he says. “This is a critical time for strategists.”
THAILAND: SUCHART TECHAPOSAI, CLSA
Leaving aside its popular tourist destinations and Instagram-worthy beaches, Thailand is a complicated emerging market country.
Just over four years ago the military seized control of the government and has held power since. After repeated delays, Thailand is finally preparing for a general election in early 2019 – and the results will almost certainly have a big impact.
For Thailand’s top strategist, Suchart Techaposai, this “will they, won’t they” pursuit of democracy in Thailand is the most important theme for investors.
“There has been a lot of doubt [from investors],” he says, “and the role of writing analysis from Thailand has been to convey the message about the underlying effects, as well as the latest developments on the ground, so that international investors have a better understanding, and hopefully have less doubt and more conviction and confidence in the long-term growth.”
Techaposai has an interesting strategic view on Thailand, having started his career as a buy-side analyst before moving to Citi and later CLSA, where he has spent the last five years.
Today, he works with a team of six other people, all of whom have at least a decade of industry experience. His team spends each day diligently gathering factual information and talking to industry leaders and academics to give investors the clearest view possible on Thailand’s political regime.
“The country starts with a negative point with this type of politics,” says Techaposai.
“In this type of environment, there are a lot of rumours, and we have to separate them [from fact].”
Because of his career path, Techaposai believes that he is more cautious than some of his peers.
“My calls can be out of sync with the earnings dynamics,” he says, “but it is more in line with the bigger picture.”
Working on the sell side now, Techaposai has to be a step or two ahead of his former buy-side colleagues, understanding what they are thinking about and where the next risks will arise. His caution is apparent in all of his writing.
“Even in my most bullish notes, I tend to highlight the risks,” he says.
At this point, rumours are still swirling around the reality of an early 2019 election.
“A lot of investors still have doubt that there will ever be an election,” says Techaposai.
If the election does go ahead, Techaposai’s top stock pick Kasikornbank will benefit.
“The asset quality issue is now behind us, interest rates are on the rise and loan growth should rise with private investment after an election,” he says.
VIETNAM: HOANG VIET PHUONG, SAIGON SECURITIES
Like many emerging markets, Vietnam can be a black box for investors.
“In Vietnam, information transparency still needs to be improved,” says Saigon Securities’ Hoang Viet Phuong. “We try to provide a transparent view for foreign investors that want to come into Vietnam.”
Hoang, who has been a financial analyst since 2007, manages a team of 16 analysts, all tapping their local knowledge to open Vietnam up to investors.
When Hoang began her career, foreign indirect investment in Vietnam was peaking. A few years later, stocks bottomed out, and many foreign funds closed. In the last five years, Vietnam has clawed its way back, becoming a manufacturing hub in the region.
For Hoang and her team, there is plenty of work to be done educating investors about some of the country’s changes. For instance, the government has encouraged more private companies to develop, in order to promote competition in the market.
Vietnam’s state-owned companies have dominated many sectors of the economy, from banking to oil and gas, but the private sector has become increasingly active and competitive.
These private companies tend to be more transparent than the state-owned ones, and foreign investors see them as more attractive, says Hoang.
Many private companies provide financial information in English and are willing to meet with investors.
“If Vietnam continues with its reforms and privatization process, there is the possibility that we could be upgraded from the frontier market status to emerging market status,” says Hoang.
Vietnam is steadily improving in terms of ease of investment, she says, and foreign investors will only find increased opportunities.
The growth of manufacturing, particularly for mobile phones, will play a key role in how investable Vietnam is in future as well.
Despite the positive changes, it still has a way to go.
“The government is willing to [reform], but the implementation seems to be slower than expected,” says Hoang.
She looks for reforms around foreign ownership limits, or the initial public offering process, to encourage more foreign investors in the near future.
“As Vietnam is a growth economy, we still favour growth stocks for Vietnam,” says Hoang. “The good news is that we can find growth stocks across many sectors.”
But given the volatility of the financial market, Hoang says she prefers industrial stocks as they are the base of economic growth.
Top stock picks include Airports Corporation of Vietnam, Hoa Phat Group, and Vietnam Engine and Agricultural Machinery Corp.