Tuesday, 21 February 2017
Last updated 3 days ago
Feb 8 2013 | 1:05am ET
Tiburon Partners founder Mark Martyrossian, borrowing a phrase from “the late, great Ian Dury,” counts three reasons for cheerfulness looking ahead to 2013—especially when looking at Asia.
During during a recent conference call with reporters, Martyrossian, whose firm runs three Asia-Pacific funds (two ex-Japan, one Japan exclusively), said the first reason for optimism was better-than-expected U.S. statistics—particularly employment and housing market numbers. This growth, if it continues in 2013, will be “very positive indeed,” said Martyrossian while admitting, “that involves quite a big 'if.'”
Reason number two, by his reckoning, is positive news from Japan—a weaker yen, helping that country's exporters. “Whether that is going to be powerful enough to help the world, I don't know, and clearly a weaker yen, whilst helping Japan, is obviously going to provide something of a headwind for the more export-oriented Asian competition,” he said.
Reason number three “has a lot to do with China.”
China Turns A Corner
“For much of last year, we felt a bit like Robinson Crusoe in saying China's economic obituary had been written a little bit prematurely,” said Martyrossian. “Our view was that the slowdown in China had been engineered as a result of tightening policies instituted by Beijing from mid-2009. And what we saw at the beginning of last year was a reversal—not a complete volte-face, but at the edges there was a reversal and a number of rather looser measures were brought in.”
Martyrossian said China's once-a-decade transfer of power, which saw Xi Jinping replace Hu Jintao as president last November, had a stabilizing effect on markets, and while some might argue the handover was a “foregone conclusion,” it wasn't entirely without drama.
“As recently as October, when Xi Jinping canceled a state engagement, there were all sorts of conspiracy theories which linked into the scandal involving Bo Xilai and his murderous wife. This, in a febrile environment, saw a lot of worried debate about the politics.”
Khiem Do, who heads Asian multi-asset for Baring Asset Management in Hong Kong and who shares Martyrossian's optimism about China, told FINalternatives that the Chinese economy had actually turned a corner before the power transfer.
“We think that the economy started to turn up in about September last year, so at the moment, it is still recovering from the deceleration of growth up to last September.”
Do, who said the consensus forecast for Chinese growth in 2013 is a “still very high” 8%, pointed out that, although the new leaders are in place, their policies won't really be known until they've met with the heads of ministries, provinces and local governments—many of whom are still in the process of being appointed.
“It is a long process because, as you know, once the new leadership is in place it lasts for 10 years, so they take their time to make sure they have the right people in the right jobs,” Do said. “It does take quite a long time for us to hear about the announcement of what their economic vision is and what their plans are and what their policies are. I think that we will know much more about that by October of this year.”
But that, said Do, isn't necessarily a problem for investors.
“It's like in the U.S.—with the U.S. elections and fiscal cliff, the U.S. economy actually last year did quite well. From Asia, we thought, 'Oh, maybe U.S. households and U.S. businesses may wait for the outcome of the elections first and then, once they know that, then they will have to wait for the fiscal cliff negotiations to see what taxes are going to be raised and which government spending is going to be cut, and so forth. But, lo and behold, in fact we have seen some of the best employment numbers over the last six months in the U.S. I think that once you have got a bit of momentum in the economy, the economy will continue to grow and will continue to recover, and that's exactly what is happening in the U.S. and that's exactly what is happening in China.”
Do said Barings has added to its China investments in the past two months.
“We thought that the sentiment was very negative, the economy was turning and valuations were attractive, so that is a great combination of fundamental and technical factors for us to add to China. So we did that. I think that China this year could be a surprise.”
Martryrossian said Tiburon's China exposure is currently 12% to 13% and includes consumer plays like Hengan (“the Kimberley Clark of China”), drinks and instant noodle maker Tingyi, and Samsonite. They also own stock in China Mobile.
Martyrossian remains bullish on infrastructure in the country, despite “the bears who point typically to overcapacity” (for example, airports that are “bright and big and state-of-the-art—but empty”).
“We've heard all this negative stuff before but nevertheless we feel pretty positive about the infrastructure investment that's taking place,” he said. “Rail in particular we feel has major benefits and the knock-on to general productivity. And as for the bearish arguments against infrastructure spending and the fact that there may well be an infrastructure bubble, we take solace from the fact that the central government, which is behind these projects, has a strong balance sheet.”
Do said infrastructure spending will develop the same way he expects Chinese exports to develop: growth, but at a decelerating rate.
Martyrossian also sees potential in Chinese property, a market he said has benefited from a “targeted loosening in policy” designed to “squeeze the speculative element out.” That, he said, has been achieved—policy changes have stimulated sales to end-users and the property market has “generally stabilized.” The thing to keep an eye on now, he said, is the reformation of the hukou—the housing registration system which prevents rural people who move to cities from becoming official urban residents.
“I don't think it's going to happen overnight but if that strict system that disenfranchises [migrant workers] were to be reformed, then there are forecasts that possibly 100 million people requiring new units of residential property over the next three years could enter the market.”
Tiburon's “sanguine” view of China has also spurred the firm's exposure to resources.
“We don't think there's a hell of a lot of value in the big integrated miners,” said Martyrossian, “but we like shale oil, particularly in Australia, where we own Santos and Beach Petroleum, and we're very positive on a stock called Iluka, which has mineral sands assets. Mineral sands, as you know, provide the material for white paint and ceramic tiles, and we think particularly the social housing programs that are going on in China as well as the private real estate market, which we're positive on, are going to mean that mineral sands will be strong.”
Do said Barings' Asia Pacific Fund, which invests strictly in Asian markets—“no Australia, no Japan”—is currently overweight China, Indonesia and Thailand. The fund plays themes, rather than sectors or regions, and has four it favors at the moment.
“The first one is the very competitive multi-national brands,” said Do. “These are Asian brands which are able to compete very strongly around the world, like Samsung, LTG, Hyundai. I mean, anyone who can compete against Apple Computer is pretty cool.”
Second is smart phones, which may be “passé” in America, but which still have growth potential in China and the rest of Asia, while third is consumption—particularly luxury goods (“Louis Vuitton, Porsche, BMW, Prada”), cars, houses, hospital services, insurance and more.
Do's fourth theme is yield: “With the thirst for yield, obviously, in the equities market, if we can spot some companies which pay a high-dividend yield and which can grow the dividend yield as well, then that would come onto our radar screen.”
Beyond The Great Wall: Japan
But China, even if it is the world's second-largest economy, isn't the only story in Asia. It was news from Japan that provided Martyrossian with a second reason to be cheerful.
That's a mood he shares with Masayuki Kubota, a senior fund manager at Daiwa SB Investments, which runs the Japan Equity Fund. Kubota expects the Japanese economy, which grew 0.8% in 2012, to grow between 1.5% and 2% in 2013 thanks to exports, aggressive fiscal policy and asset inflation.
“The most important factor is exports,” Kubota told FINalternatives. “I think Japanese exports will increase on the back of a firm U.S. economy and Chinese economic recovery. The weaker yen will help boost Japanese exports.”
Public investment will increase, he said, driven by the new “capitalism-oriented” government of the Liberal Democratic Party and its public works package; as for asset inflation, Kubota said he expects aggressive monetary easing by the Bank of Japan this year, increasing liquidity and boosting real estate and equities. “That will have positive impact on Japanese consumption.”
Kubota thinks the new government, under Prime Minister Shinzo Abe, will also deregulate industries (including real estate development in big cities, agriculture and healthcare); strengthen Japanese-U.S. relations; restart nuclear power plants; and take “concrete action” on Japanese participation in the Trans-Pacific Strategic Economic Partnership Agreement, which will allow Japan to export duty-free to the U.S. and Asian countries.
None of these will be cake-walks, however, and progress on some items—like the power plants—may hinge on the results of elections to the upper house of the Japanese parliament, scheduled for this summer. If the LDP, which controls the lower house, wins a majority, it will have full control.
Kubota sees Japan's relations with Korea and “especially” China as problematic, but believes the LDP “will be extremely careful to manage territorial problems so as not to cause any further troubles. They will try not to make any statements that might aggravate tensions with China or Korea, so as not to invite any trouble ahead of the upper house election.”
For 2013, Kubota said his main investment theme is “the dramatic recovery of Japanese manufacturing industry.”
“My dramatic recovery story does not include Sharp; the Japanese consumer electronics industry has lost its competitive edge. Also, the weak yen will not help them to recover competitiveness. My story focuses on machinery, auto and industrial electronics sectors/companies.”
The Japan Equity Fund is overweight these companies and financials.
Japan's good news could spell disaster for Korea, but Martyrossian still sees opportunity in that country—Tiburon owns POSCO, for example, the Korean steel producer:
“At a time when Chinese steel companies have gone up 50% and they're loss-making, it seems to us anomalous that the leading regional steel-producer POSCO, which is profitable and is trading at 0.8 of book, has hardly done anything by comparison."
“By the same token, we're happy to hold Korean autos, which have been marked down heavily in response to the weakening of the yen, the bearish argument being, obviously, that with a weak yen Toyota is going to clean up at the expense of Kia and Hyundai. We think that there's something in that argument, although we think that the trade has overshot the runway. Number one, a lot of Korean autos are now manufactured outside Korea and consequently, we don't think the won/yen rate is as significant as the short players would have you believe, and secondly, valuation in the Korean autos now is between six and seven, we don't think that's justified when you compare it to Toyota at 12.5.”
Do, who said the Korean market is cheap and should be bought, was also cautious about the won/yen relationship, noting that the Korean currency has appreciated close to 20% against the yen over the past few months. While, in theory, this should make Japanese goods cheaper, Do said it doesn't always work out that way because “there are leads and lags, and also it depends on where you have your production facilities and what costs are involved there, what exchange rates have you locked in—it's much, much more complicated than that. But basically, the weak yen is offering Japan a chance to take some market share back from the Koreans and that is what is stopping the Korean stock market [from] doing better.”
Asked about the world's second-most-populous country, Do said he likes its demographics.
“Unlike Korea, unlike China, Indian demographics, along with the Philippines and Indonesia, are some of the best in the region. By favorable demographics what I mean is the number of people involved or participating strongly in the workforce is high compared to those who are retiring or who are dependents. India is in its golden phase of favorable demographics, which was the case for China about 10 or 15 years ago. But China is about to enter a phase where the dependency ratio will rise and the active number of people in the workforce as a proportion of total population will decline."
“I think that, in terms of India, inflation also has started to turn down a little bit and the Indian economy over the next 12 months should show signs of recovery, maybe back to six, six-and-a-half percent. At the moment it is between five and five-and-a-half percent, but we think that over the next 12 months it can show a recovery. And Indian companies, by and large, are quite well-managed. They tend to offer very high return on equity, so that's quite attractive as well.”
In making the case for investing in Asia in general, Do also cited demographics, saying Asia has a more favorable demographics profile than the U.S. or Europe or Japan.
“Asia going to offer more sustainable and higher economic growth and corporate earnings growth over the next 10 years,” said Do. “It also has a better balance sheet. The balance sheet of Asian governments, Asian corporates and Asian households is definitely not as stretched as the balance sheet in America, or Europe or Japan. So you have growth, you have balance sheet strength and you have great valuations as well."