GLOBAL EMERGING MARKETS MAY 2016

Transcription

1 GLOBAL EMERGING MARKETS MAY 2016 FOR PROFESSIONAL CLIENTS ONLY TALES FROM THE ROAD SOUTHEAST ASIA With China s economic slowdown dominating the news, it is easy to overlook dynamics elsewhere in the region. A recent research trip to Southeast Asia, including visits to the Philippines, Indonesia and Thailand, has underscored the importance of looking beyond the headlines when assessing the potential of emerging markets. As bottom-up investors we always come back to the company level, and while many regional businesses may be going through a difficult patch, the trip helped isolate candidates for further research. Alastair Reynolds Portfolio Manager, Global Emerging Markets

2 active VIEWPOINT: GLOBAL EMERGING MARKETS Short-term snags, long-term opportunities Southeast Asia is one of the fastest-growing regions in the world. With attractive demographics, comprised of young (growing) and increasingly educated populations, as well as a growing middle class, it is difficult not to feel sanguine about its future. However, the current investment backdrop varies from country to country, based in no small measure on how each is positioned in relation to the broader global economy. And the mood on the ground reflected this, with the optimism distinctly stronger in some of the countries visited. In the case of Indonesia, where there is a high reliance on oil & natural resources to drive the private sector and to fund the state budget, the fall in prices of commodities in recent years has meant that the government has had to borrow and spend to maintain growth and employment. Meanwhile, the rupiah has been under pressure and consumer sentiment weak with an impact on cyclically sensitive areas such as the consumer discretionary sector. Following my company meetings there, it was clear that some management teams remain anxious about potential further exogenous shocks. In Thailand, a slowdown in manufacturing exports and a protracted period of political uncertainty have also damaged confidence in the domestic economy. Tourism, buoyed by a major influx of travellers from China, has stayed strong, but remains vulnerable to new bouts of internal ructions. By contrast, in the Philippines, where the economy is less dependent on trade and more driven by domestic consumption and services, the investment backdrop felt a lot more positive. Robust inflows of remittances from overseas Filipino workers and the continued strength in the business process outsourcing sector have been a clear fillip to the economy as evidenced by the brisk pace of growth over the past decade. Indeed, the country s jovial official tourism slogan it s more fun in the Philippines seemed quite an apt description of the atmosphere during my visit. Southeast Asia is one of the fastestgrowing regions in the world. With attractive demographics, comprised of young (growing) and increasingly educated populations, as well as a growing middle class, it is difficult not to feel sanguine about its future. Congestion in Bangkok despite having the most advanced infrastructure in South East Asia.

3 PAGE 3 The Philippines stuck in traffic It was a very interesting time to visit the Philippines, with the Presidential election campaign in full swing and consequently a heightened focus on the problems still hobbling the fast-growing economy. In my conversations with local business leaders, one particular topic kept cropping up namely the country s creaking infrastructure. Indeed, the congestion in Manila has become pretty extreme, even by regional standards. There is no underground rail network, which is unusual in a city of its size, and the three urban rail routes that do serve the city are completely overcrowded, lack modern rolling stock and operate at a snail s pace. Jeepneys, an integral part of public transport in Manila. Public investment projects in the Philippines have been plagued by corruption in the past and the current lack of investment activity owes much to the current administration s anti-graft drive. There is some hope that outgoing President Aquino is heeding the call for greater investment and may leave a legacy of infrastructure progress. In a press statement released just after my departure from the Philippines, the government announced that it had earmarked 50 projects for investment and would solicit private sector bids for US$6.5 billion of transport-related deals before the May election. While this could be a potential tailwind for infrastructure-related companies in the Philippines, I still believe it is too early to be tempted by an increase in investment spending. That said, we did have some constructive conversations with the likely beneficiaries of the government s public-private partnership plans, including Metro Pacific. The investment company has diverse interests in toll roads, electric power, water, hospitals and rail networks and is well positioned should the need for infrastructure development materialise into actual tendering processes. The company is well run, with solid drivers of revenue from existing operations, in particular its toll roads and hospitals, and would likely to be able to execute competently on any projects won. Of course, in terms of the investment case for the company at this stage, the realisation of improved future returns through a potential raft of new contracts successfully secured, and then delivered upon, is a considerable leap to make, but an area we will keep an eye on. Investment in broadband internet was another area mentioned by many as being a very urgent requirement. And it is important to note that this is an industry that operates entirely in the private sector. That the country lags its regional peers here, speaks more of its competition policy being overly protective of local businesses than it does a lack of technological capability. Despite progress under the current political administration, it took until 2015 to sign into law the country s first competition policy and the constitution still prohibits foreign investment in a long list of business sectors. The result has been limited competition and an over-reliance on a few local-based conglomerates to dictate the rate of private sector development. This is a mixed blessing for investors as the lack of competition can mean high profit margins but ultimately it results in the economy performing below its potential. In all, while a paucity of infrastructure investment could put a dampener on growth, I left the Philippines with a distinctly positive feeling and, crucially, a shortlist of interesting businesses to examine further. The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities discussed here were, or will prove to be, profitable.

4 active VIEWPOINT: GLOBAL EMERGING MARKETS Some sectors struggling, others making hay The sector dynamics were quite different in each country visited. Consumption is an overarching theme in the Philippines, manifesting itself in strong demand for (and attendant investment in) malls, housing, supermarkets, discretionary retail and cars. Infrastructure is also highly topical, with high hopes that the government will turn its bold investment plans into action and thus remove a significant stumbling block to further growth. Infrastructure was also part of many conversations in Thailand, where the military-run government is pushing ahead with its ambitious plans to extend the country s transport infrastructure with China and Japan expected to provide finance and know-how. In Indonesia, there is a great focus on the banking sector, with the central bank cutting interest rates and urging the country s lenders to follow suit in an attempt to kick-start the economy. Not to forget, in all of the countries visited the issue of opening up to foreign investment is highly relevant, particularly if they want to benefit from the Trans-Pacific Partnership a significant initiative that has been many years in the making. As an example, the Indonesian government has recently relaxed restrictions on foreign ownership in a host of sectors, including power, e-commerce and retail. A glass half full Companies in the Southeast Asia region carry high valuations so it would be a stretch to say that the opportunity set of mispriced stocks is large. Even so, we are optimistic with regards to the growth prospects in the Philippines, and although we don t currently own anything there, we will be doing follow-up work on a number of consumer, real estate and infrastructure-focused names that we met during the trip. These include Robinsons Retail, a multi-branded retail operator with nearly 1,500 stores across multiple, differentiated formats, and Robinsons Land, one of the Philippines leading real estate firms. The former has already demonstrated a solid proof of concept for introducing modern retail outlets in Metro Manila. Recent results highlighted positive same store sales growth and increases in gross floor area. And with significant under-penetration of modern retail formats in the rest of the country, the company is looking to increase its presence outside the Metro Manila area. Meanwhile, its independently financed affiliate, Robinson Land is also well positioned to take advantage of the Philippines growth opportunities and positive consumption theme, with retail space a major component of its portfolio. Consumption is an overarching theme in the Philippines, manifesting itself in strong demand for (and attendant investment in) malls, housing, supermarkets, discretionary retail and cars. Infrastructure is also highly topical, with high hopes that the government will turn its bold investment plans into action and thus remove a significant stumbling block to further growth. The Nuvali site outside of Manila an ambitious 4000-acre development by Ayala Land. The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities discussed here were, or will prove to be, profitable.

5 PAGE 5 A new mall in the Laguna area, meeting increasing consumer needs in the Philippines. In contrast, we feel less excited about companies in Thailand currently, although some engineering and construction companies look reasonably attractive. As for Indonesia, the investment backdrop in general appears to be improving, spurred on by a string of interest rate cuts, increases in public spending and a resuscitation of the country s infrastructure plan. We have exposure in telecom infrastructures here via Tower Bersama, which should benefit from ongoing growth in telecom capex. However, the current political drive to lower the cost of borrowing could prove difficult for financial companies in particular. This is certainly the case for our holding in Bank Rakyat, which despite being a beneficiary of rising economic activity in an underpenetrated credit market, now faces a challenging loan-rate adjustment in the short term. Elsewhere, we feel that a number of cyclical firms now merit further attention, including Media Nusantara Citra (MNC), a leading local media business (with a core focus on TV broadcasting) which stands to benefit from a rise in advertising spending. There are a number of drivers for the advertising market in Indonesia, including its large (and young population), and a low penetration of advertising spending as a percentage of GDP. MNC is exposed to these positive secular themes with TV still the dominant advertising medium. However, despite the cyclical positivity currently associated with MNC, we need to consider any potential opportunity here at the company level, assessing its ability to sustain returns into the long term. In this respect, online advertising is a key threat in the medium term, with this area of the advertising market in Indonesia experiencing significant growth. How MNC copes with these challenges will be a key determinant of any investment case. In fact, irrespective of the investment backdrop, the common feature we look for in a company is proof of business sustainability. We analyse whether each company can successfully navigate whatever storm they may be facing, testing for changes in their relative standing against their competitors, and look for evidence that the company is well placed to benefit from any change in business conditions. It is always gratifying to return from a research trip with improved conviction and new ideas to put under the microscope. Equally important, however, is getting a good sense of areas and companies with more problematic outlooks. Indeed, relativity is the operative word, as knowing what not to invest in helps us home in on the potential long-term winners that qualify for inclusion in our portfolio. It is always gratifying to return from a research trip with improved conviction and new ideas to put under the microscope. The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities discussed here were, or will prove to be, profitable.

6 active VIEWPOINT: GLOBAL EMERGING MARKETS active VIEWPOINT is just one part of our range of investment materials. To access further perspectives on our strategies and key investment themes, visit: Find out more For further information on Martin Currie or our strategies please visit our website You can find your local contact at Or please call our global offices, press office or global consultant team on the numbers below: Edinburgh (headquarters) 44 (0) Asia and Australia (61) London 44 (0) New York (1) Media 44 (0) Global consultants 44 (0) Important information This information is issued and approved by Martin Currie Investment Management Limited ( MCIM ). It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested. No representation or warranty, express or implied, is made to its accuracy or completeness of this information. Please note that the opinions contained in this document are those of the named managers. They may not necessarily represent the views of other Martin Currie managers, strategies or funds. Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document. Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment. Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets. For Investors in the USA, the information contained within this document is for Institutional Investors only who meet the definition of Accredited Investor as defined in Rule 501 of the United States Securities Act of 1933, as amended ( The 1933 Act ) and the definition of Qualified Purchasers as defined in section 2 (a) (51) (A) of the United States Investment Company Act of 1940, as amended ( the 1940 Act ). It is not for intended for use by members of the general public. Any distribution of this material in Australia is by Martin Currie Australia Limited ( MCA ). Martin Currie Australia is a division of Legg Mason Asset Management. Australia Limited (ABN ). Legg Mason Australia Limited holds an Australian Financial Services Licence (ASFL No. AFSL240827) issued pursuant to the Corporations Act Martin Currie Investment Management Limited, registered in Scotland (no SC066107) Martin Currie Inc, incorporated in New York and having a UK branch registered in Scotland (no SF000300), Saltire Court, 20 Castle Terrace, Edinburgh EH1 2ES Tel: (44) Fax: (44) Both companies are authorised and regulated by the Financial Conduct Authority. Martin Currie Inc, 1350 Avenue of the Americas, Suite 3010, New York, NY is also registered with the Securities Exchange Commission. Please note that calls to the above numbers may be recorded.