Wed, 2 May 2012
Large Asian opportunities exist, but there are also some trouble spots, says Schroders' Matthew Dobbs.
Alanna Petroff: Morningstar just wrapped up its sixth annual Investment Conference, where we covered a number of different topics to do with investing, bonds, and the markets. I got to catch up with one speaker, Matthew Dobbs, who is a fund manager at Schroders, and he specifically focuses on Asia.
I started by asking him about his favorite Asian markets right now. Here's what he had to say.
Matthew Dobbs: Well, I mean, the great thing about Asia is there's lots of different countries. I think, we're finding opportunities in almost all the countries there. I think, the areas that are … Perhaps one country that's most challenged at the moment would be India. Although long-term I think it looks very attractive, the political and inflationary issues there, I think, are ones that they need to be addressed. And we like – on the whole, we like some of the more developed markets. We like Hong Kong. We think Hong Kong is, in a way, a cheap option on China, and long-term we like China; short-term we're being cautious about some of the issues in corporate governance and profitability. We also like Singapore, where we think again corporate governance is very strong, strong companies, interesting areas.
Petroff: I also asked Matthew about why he didn't like China right now, at least for the short term.
Dobbs: Well, I think the issue with China is that the growth has been very driven by capital investment, the contribution of fixed asset investment as they call it, which covers both private and public government spending investment. It's being 70% or 80% of the growth. That's a very high number. And indeed, consumer spending as a percent of the economy in China has consistently fallen for the last 20 years. It's still been growing at about 9%. It’s just being growing at a lower rate in the Chinese economy. So, I think the issue for us is, there's a big reorientation of the Chinese economy that's needed. I think, there could be some quite surprising prints in terms of growth number. Our view actually is China does need to grow a bit more slowly, but it needs to be sort of high quality in terms of where it's coming from. To be fair to the leadership, I think they realise those problems, but of course we are going through one of China's once in a decade election processes. So I think the problem is that right now those big issues are being deferred a bit into early next year.
Petroff: Now you said also that you like manufacturing, that in Asia they make things, and you're quite happy about that. Can you explain that a little bit more?
Dobbs: Yeah. I mean, I think, the manufacturing covers a lot of different companies, and I think, there are a lot of companies who are very challenged. They're very low value added, simply a labour cost arbitrage. We're not interested in those. But there definitely are smaller group of companies, where we do feel that actually their ability – their pricing power is increasing, because actually their smaller competitors are going out of business. The fact that financing is tight, trade finance has been difficult, SMEs being under pressure, it actually means that the bigger players, they're actually taking market share. The fact is for Home Depot or Wal-Mart, yeah, their sales in aggregate may not be growing very fast, but you do need T-shirts and power tools to sell, if you're going to sell anything, and therefore, it's very important for them to have a stable supply chain, and that need for stability of the supply chain is playing into the hands of some of the sort of traditional larger-scale industrial companies.
The other area, a sort of broader area, which you might call ‘industrial’ is, of course, information technology. That's an area, where we do like selectively some companies. Samsung, I think, is a great business, showing their abilities to go up the value added curve, it's now really head-to-head with Apple on the handset side, but it's not just handsets in the case of Samsung. You've also got someone like Taiwan Semiconductor, where as we all want smaller and smaller cellular devices, which will do more and more for us, there is this enormous pressure on power and size of chipset, and efficiency, and that's exactly where Taiwan Semiconductor is, and they are several generations ahead of their competition in terms of what they're doing.
Petroff: For more articles and videos about Asia, check out the links below.