December 2019

Executive interview: ‘Bull markets don’t die of old age’

Chris_AldersonHaving a balanced portfolio in the midst of the longest expansion in history is an investment imperative, Chris Alderson, co-head of global equity and head of international equity at T Rowe Price International, tells Romil Patel. What investment trends are you observing in Asia and which pockets look exciting to you?
Asia is not isolated from the rest of the world, so all of the trends are very global at the moment. The key trends that are very prevalent would be declining interest rates everywhere, the US Federal Reserve (Fed) cutting rates again, negative yields in Europe and Japan, quantitative easing potentially coming back and all the central banks trying very hard to prevent a global recession, or at least a sharp global slowdown. Then overlaying that is the geopolitical issues, mainly the China-US trade war. Those are the key factors that are affecting markets. Within that, there are still pockets of secular growth, places such as India, Indonesia and the Philippines that have got nice long-term domestic consumption stories but other than that, the world has become a very global place in terms of trends of growth versus value, or cyclicals versus defensives – lots of things tend to move in sync. What is your approach to timing Asian equities, particularly in what is a difficult global environment?
Bull markets don’t die of old age. They tend to die either of extreme valuation, or earnings turning down, or recession, or if there is a severe tightening of policy. Policy is absolutely not tightening – it is loosening all over the world because all the central banks are concerned about a global slowdown. It’s possible that we are going to get an earnings recession, and that certainly is something to look out for. Markets don’t look especially expensive, they are possibly on the upper end of normal, but they are not crazily valued. Almost all the big platform companies today have very strong cashflows and balance sheets and we think the valuations of those are fine. There’s no doubt that the value stocks look cheap, the question is whether the earnings can hold in there. If earnings hold in there or even accelerate a bit, there’s no question that the cyclicals and the value stocks are exceptionally cheap. Value is a two-standard deviation cheapness event; one big question is whether the bull market can continue and whether we can get a handing on of the baton from the leadership from the growth stocks to the value stocks without a correction in markets. In general, valuations in Asia look fine and valuations in China look very cheap. What are your selectivity criteria given the current risky environment?
I sit on our asset allocation committee and we have been steadily taking money out of equities for the last 12 months or so and adopting a somewhat more cautious stance. Whilst we don’t think a global recession is around the corner, central banks are loosening policy. Because valuations are a bit full and because there are plenty of risks out there, we think it’s prudent to somewhat underweight equities at present. Within equities, we’ve got an overweight still to the best long-term secular growth companies, but within that barbell approach, we also very much like some of the high-quality cyclicals, particularly those long-term growth cyclicals that have been very sold off. If the world hangs in there, then you can get quite a nice upcycle in there. You definitely want to avoid companies that have got low margins, impaired balance sheets and are potentially on the wrong side of disruption. You’ve got to be very careful that you’re not owning companies that optically look cheap but are very secularly challenged, but that’s more a function of micro factors and disruption factors as opposed to global macro factors. It’s very difficult to predict what’s going to happen with some of the big global geopolitical events, but we think there will be a deal between the US and China. It is in the interest of both sides to come out with a deal – President Trump very much wants to get re-elected, and the election is less than 12 months away. On the other side of the coin, the Chinese leadership’s main goal under Xi Jinping is full employment, and a big global recession wouldn’t help that. China has taken significant measures to open its domestic equity and bond markets. What opportunities has this created for foreign investors?
We are enormously excited by the investment opportunity in China. Global headlines about the US wanting to delist Chinese companies or talking about investing less in China are staggering – we should be doing precisely the reverse. One, you have the economic miracle; secondly, the markets have been steadily opening up and the fact that we have 3,500 companies available to foreign investment now through the Hong Kong-Shanghai Connect has worked spectacularly well. China recently removed all the quotas on Qualified Foreign Institutional Investors (QFII), so it means that every single one of the quoted companies in China is available to foreign investment. This is the most exciting investment opportunity on the planet, given the number of quoted companies in the US has been coming down. The Wilshire 5000 now contains about 3,500 companies because more have gone private, been delisted or been taken out as part of M&A. So, there are a similar number of companies quoted in China as the US – that’s very fertile new field for foreign investors. We’ve been working hard to deepen our research team. Our research team covering China is based in Hong Kong or in Singapore. We don’t currently have a presence on the mainland but we’re actively looking at establishing a mainland office, not because we think we’ll get a better information advantage by being on the mainland, but because of coverage and commitment. If we have an office on the mainland, Shanghai or Beijing most likely, then we’ll be able to attract and retain more mainland Chinese analysts through time, and that will lead to better coverage of the opportunity set. Why does T Rowe Price currently prefer Asia investment-grade bonds and maintain a higher quality bias for Asia high-yield exposure?
High-quality bonds are in demand all around the world. Sovereign yields are at zero or negative and if you can find high-quality corporate bonds with decent yields, assuming that those companies have quality balance sheets behind them, it is a much better way to get income. How is T Rowe Price helping to generate sustainable returns and income as life expectancy increases to 100 years-plus in certain parts of the world i.e. Japan?
Within Asia, Japan is a more mature investment market than China. Japanese life expectancy is higher than the rest of Asia – partly due to diet, partly air quality. In the US, we are one of the leaders in what we call target-date funds and retirement planning and what we tend to do is we have a glide path where when you are younger, you have a higher allocation to equities and when you get older, you become more conservative and you’re more focused on income. In contrast to a lot of our peers, we run through retirement glide paths, so you don’t get to retirement and then suddenly become defensive. It depends when you retire, but if you retire at 60 and live until 100, 40 years to living off your savings is a long time and daunting prospect, so we will run those glide paths well through retirement, taking into account the fact that people are very likely to live longer in the future, so you’d still want to keep a higher equity allocation for ten to 15 years post-retirement because you need not just the income, but also the growth in your assets through time. In terms of sustainability, where do you see some of the best investment opportunities in Asia?
ESG is extremely important – we incorporate it into all of our investment report. Every single one of our analytical reports has a link to our in-house proprietary ESG research. There’s a fairly simple traffic light approach – red, amber and green – in terms of how sustainable and ESG-friendly companies are and particularly in this day and age, where millennials won’t buy goods from companies that they don’t think are doing good. All those consumer product companies that sell everything in plastic bottles, for example, those companies are going to need to change that pretty quickly or customers are going to go elsewhere. It’s not just good for the world, but from an investment standpoint as well. How can investors best prepare themselves for any downturn and what do you identify as the biggest risks to your investments?
Investors need to have a fairly balanced portfolio at present because bull markets don’t die of old age, but this is the longest expansion we’ve had in history. It looks like earnings growth is going to slow somewhat from here, there are definitely risks out there. Once Brexit and the US-China trade war are out of the way, people will go back to focusing on what moves markets. Markets move on interest rates and earnings, and interest rates can come down a bit further, but there’s a limit to how negative you can take them. If earnings do start to slow, that will put pressure on markets. We think that maintaining a fairly balanced approach and being cognisant of the risk at present is the right way to go. What’s on your radar for next year?
We very much like India and have done for some time. It has probably got the best long-term secular domestic growth of any country in Asia. With an under-penetration in any number of consumer services – from banking to insurance to automobiles to consumer products – there are lots of great long-term growth companies within those spaces in India. The corporate tax cut recently helps that – a lot of that has been reflected in markets already because that just goes straight to the bottom line in terms of improved cash flow – very much like the corporate tax cut that happened in America, that just goes straight into earnings growth. I still really like China – I like mid-caps and domestics in China and think they are very cheap. If there is to be a US-China trade deal, the likelihood that money is going to flow back into that area is very high. We like value in general. The difference in valuation between growth stocks and traditional value stocks is more than a two-standard-deviation event. If we got to a point in time where global growth stabilises, some of those value stocks can do extremely well. So, our global emerging markets value strategy sells on less than ten times earnings at present, earns a 4% dividend yield and has a very strong cash flow – that’s an area that I’m personally invested in at present and think can do nicely doing forward. ©2019 funds global asia

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