Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Andrew Graham, portfolio manager, Martin Currie Pacific Trust.
Asia's long-term economic outlook is appealing for investors. With a wide spread of world-leading companies, rising consumer wealth and growing regional trade, Asian equities offer attractive growth relative to the rest of the world.
Yet with "big picture" factors dominating investor sentiment, Asia has often been at the sharp end of market volatility, driven by factors outside the region. But while it's true that Asian markets can, at times, experience more than their fair share of ups and downs, the investment case is compelling.
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The best way to look through this short-term noise is to develop a portfolio based on rigorous research-driven stock selection identify individual companies with the strength to survive, even when others are struggling.
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Unlocking this potential is not easy and finding the companies that meet our investment criteria requires both in-depth fundamental analysis and conviction. But across Asian markets, well-run companies with sound finances and healthy cash flows still offer attractive long-term potential for investors.
LG Household & Health Care (Korea: 051900) is one example. We had followed the company for some years, but it was only in October last year that we felt the valuation was right. The Korean multinational is repositioning itself from being a personal care and beverage firm to becoming a global cosmetics house. It's doing this through an impressive record of acquisitions.
The valuation had fallen as a result of two events: plans to buy Elizabeth Arden in the US were dropped, and there was concern that the CEO, who has done a good job of steering the firm, intended to stand down. In both cases we took a positive view the decision not to buy Elizabeth Arden showed a good degree of discipline, and proved that the management team was strong enough to deal with leadership change.
Elsewhere, the Indian IT sector has performed well and Tata Consultancy Services (India: TCS) is one of the acknowledged industry leaders. While Indian companies have gained market share in general, Tata Consultancy also has a good long-term growth strategy and has been proactive in expanding its business into new countries.
This puts the company in a good position to overcome the inevitable cycle of upswings and downswings. In an industry that could see many years of double-digit sales growth, Tata Consultancy is clearly among the leaders in terms of both capability and returns, and has the largest opportunity to grow within its existing client base.
We specifically look for companies that can generate a good return on capital, have strong balance sheets and demonstrate good stewardship of capital. When we find them, we want to buy them at a reasonable price and own them for a long time.
Pan-Asian life insurer AIA (Hong Kong: 1299) fits the bill of a long-term "compounder". Focusing only on the Asia-Pacific region, it operates in 17 countries across Asia and offers an attractive long-term growth opportunity.
The penetration of life insurance in Asia is still very low and is set to grow considerably in the years ahead. AIA provides regional diversification and has an opportunity to grow its return on capital over time. It had a strong 2014, reporting a record value of new business growing 24% to $1,845m and a 16% growth in operating profit after tax to $2,910m.
