Looking beyond the dragon: PM CAPITAL says Asian growth doesn’t stop with China

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Investment focus on domestic consumption in regional economies; Malaysia, Philippines, Singapore, Vietnam feature in ‘bottom up’ – not macro thematic – approach

Look beyond Chine for opportunities: PM CAPITAL

Look beyond Chine for opportunities: PM CAPITAL

PM CAPITAL has said that the majority of the Australian equity market appears to be fully valued, and with the growth forecast in China likely to decline, investors need to look beyond the generalised macroeconomic thematics (which tend to dominate peoples thinking) as they consider regional investment opportunities.  After consistently posting market leading annual returns since the Fund’s inception, the investment manager of the PM CAPITAL Emerging Asia Fund has said regional investors require a targeted, bottom up approach.

PM CAPITAL’s Kevin Bertoli said the investment team remains wary of risks to China’s growth outlook.

“Within our Asian Fund, exposure to the gaming and internet search/portal themes, with exposure to Malaysia, Philippines, Singapore as well as China, continue to drive our performance as did underweight positions in financials and commodities,” he said. “We see the biggest risk in Asia being China growth related and will remain cautious and selective as this slowdown reverberates around the region, given its importance to most of the neighbouring economies.”

“Our method is a research intensive bottom-up approach and despite the lower growth forecast, we are finding genuine value  in industries that are supported by rising domestic consumption or that are benefiting from changes to consumer consumption patterns. These structural growth stories coupled with sound business fundamentals, which are not largely impacted by the macro-economic environment, are our main target,” Mr Bertoli said.

PM CAPITAL’s sector leading Emerging Asia Fund recently posted another strong result in the last twelve months, recording a 45.1% return compared to the 16.8% growth in the MSCI Asia (ex Japan) benchmark.

Mr Bertoli said regional equity markets continue to be skewed to the financials and commodity sectors, which have a high presence of state owned industries. “We believe the outlook for these industries remain uncertain and do not present the best investment opportunities.”

“Currently only approximately 38 percent of the fund’s capital is invested in businesses operating primarily in China, with the balance allocated to companies focused outside of this, particular South East Asia as well as globally and cash,” said Mr Bertoli.

The one investment made during the last quarter was Malaysia based brewer Guinness Anchor Bhd, which is controlled by Heineken, whilst positions in China Resources Enterprise and PT Tower Bersama Infrastructure were closed out after reaching recent highs and internal target prices.

“We remain concerned about the sustainability of Chinese growth in the short to medium term and deliberately seek investment opportunity beyond China.”

The result continues the stellar performance run of the Fund, which has averaged a return of 21.9% per annum since inception in 2008, the corresponding benchmark return (MSCI ASIA ex Japan index) was 3.6%. The Fund has also generated a total return since in inception of 197.8%, outstripping the relevant benchmark many times (21.4% comparative benchmark return). The results are particularly notable given over the last six months the Fund has remained, on average, less than 80% invested.

PM CAPITAL believe the Australian dollar is over valued and results for this quarter were aided by a depreciation of more than 4% in the Australian dollar and the funds un-hedged currency position.

Fund positions

Investments in internet franchises form the largest single allocation of funds (35%) with positions in the Malaysian based iProperty Group, which has a similar business model to realestate.com.au and operates leading search sites across the region; Jobstreet, a SEEK-style online jobs business with a strong presence in Malaysia, Singapore and the Philippines, in which Seek has a 22% stake; and Baidu, a China-only internet search provider with 70-80% industry revenue share, whose position has been further strengthened by the departure of Google from the Chinese market.

“Gaming holdings were the largest contributor to the December results with ASX listed Donaco International, purchased in the September quarter, appreciating in value by more than 100% after receiving its gaming table allocation and a 30 year licence for its Casino in Vietnam adjacent to the Chinese border.”

“The PM CAPITAL investment style for the Emerging Asia Fund is a contrarian, high conviction one where investments are purchased on the merits of their risk reward characteristics, which typically reduces the investible universe to 15-20% of the market. It is a bottom up approach which also explains why our fund is likely to significantly differ in composition from a benchmark focused fund,” Mr. Bertoli said.

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