Dig deep to find value in Asian stocks

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Andrew Graham, manager, Martin Currie Pacific Trust.

Uncertainty has become a permanent feature of the world’s stock markets with ‘big picture’, macroeconomic fears hanging over investors. This has been particularly pronounced in many Asian markets, especially those countries with high current-account deficits or political and social unrest. However, the appeal of Asian stocks remains strong.

Many offer good value and trade well below their long-term averages. So how do you best get exposure to the opportunities on offer against such an unpredictable backdrop?

Our approach is to take a longer-term view. We dig deep to identify well-run companies with sound finances and healthy cashflows. This gives us the confidence to ride out the short-term macroeconomic ups and downs, and to unlock the intrinsic value of quality stocks bought at attractive valuations.

For instance, Anglo-Australian multinational mining and petroleum company BHP Billiton (LSE: BLT) slipped towards the end of 2013, following falls in commodity prices. Profits for the year were hit by weaker prices for its core products – particularly base metals and iron ore – as well as some significant write-downs in the value of its assets.

Many managers would have sold the stock. But we believed the underlying investment case remained strong, based on the impact of falling capital spending, deleveraging (debt reduction), cost-cutting and the simplification of its business.

The company has since performed well, returning to profit in the first quarter of 2014 on the back of good production figures.

Likewise, in 2013, Chinese oil producer CNOOC (HK: 883) struggled as a number of scheduled projects failed to launch on time. Based on our in-depth understanding of the company and the sector, we determined that the project holdups would be delays rather than cancellations, and so remained positive on the company’s medium-term growth prospects.

The company has now begun to perform strongly after an update provided new information on its production growth profile and reserves.

We faced a similar scenario recently for one of our holdings in the materials sector. Korean chemical company LG Chem (LSE: LGCD) was buffeted by macro factors – specifically weaker expectations for Chinese demand.

However, our investment thesis for companies is to take a broad approach, placing significant emphasis on the importance of sustainable growth, strong management and strategic market position.

As such, we have been able to see through the unfavourable short-term market conditions for LG Chem and, having met with the company’s management, we believe that circumstances point to an earnings recovery in its core petrochemical division – inventory in the system is well below normal levels and demand growth is tentatively forecast to outstrip industry supply growth.

Recent events such as the military coup in Thailand as well as the ongoing concerns about slowing growth in China testify that there is still no shortage of macro-factor uncertainty in Asia.

While we can’t expect any change to the level of this externally imposed unpredictability – and although past performance is not a reliable indicator of future returns – maintaining a focus on attractive, high-quality and sustainable businesses should leave investors in Asia well placed to access the vast potential of the region’s companies in the year ahead.


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