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Mark Dampier: First State Asia Pacific Leaders


Asia always excites investors. It is home to some of the most dynamic economies in the world and given the outstanding, albeit volatile, long-term performance of its stockmarkets, it is no wonder it continues to spark interest.

It is always refreshing to hear an honest and balanced view on Asian equities. I can usually rely on the First State team and a recent meeting with Richard Jones, co-manager of First State Asia Pacific Leaders, was true to form.

Jones says it has recently proved difficult to find value in the region, despite periods of market weakness over the past couple of years. Global economies are contending with vast debts, which are likely to provide an overhang for some time. Asian and emerging markets are not immune and in the event of another hiccup, governments across the globe have fewer tools at their disposal.

That said, Jones and his team are encouraged by the long-term prospects for Asia, supported by favourable demographics, an expanding middle class and improving corporate governance. They are, however, far more cautious than many others in their short-term outlook.

While Jones anticipates further setbacks, he is a patient investor focused on businesses more likely to withstand economic uncertainty. He seeks cash-generative companies which have built barriers against possible competition, sound balance sheets and pricing power. Historically, the fund has been tilted towards defensive areas of the market and higher-quality, larger companies. While many businesses in this category are trading on relatively high valuations, the manager is comfortable with their long-term prospects.

He is excited by India, where exposure has increased to one-fifth of the portfolio. Historically, the Indian economy and politics have been messy, providing a far from conducive environment for businesses. As a by-product, Indian firms have built strong “moats” – they are often well managed, with an emphasis on minimising costs and maximising returns. They are also fairly risk averse and often family owned, aligning their interests with those of shareholders.

The team at First State has always liked Indian companies but valuations have often been too expensive to excite it. General weakness and volatility in the Indian stockmarket over the past couple of years have provided a far more attractive entry point. A real game-changer could be the recent election of prime minister Narendra Modi. 1984 was the last time one party won a clear majority and the result could prove a clear mandate for change.

Elsewhere the fund holds 14 per cent in Australia although this is lower than the benchmark weighting. The country has increasingly seen its fortunes linked to the Chinese commodity boom, which is coming to an end. Prices and wages are now very high while productivity is poor. Its currency also looks vulnerable. But Jones is happy to maintain positions in a number of high-quality Australian companies, several of which are exporters that are less reliant on domestic demand.

The fund has some flexibility to invest in companies listed in developed markets although valuations across the developed world are generally less attractive since the global stockmarket rally. Outside Australia, the fund holds just two developed market-listed stocks: Japanese firms Unicharm and Pigeon, manufacturers of personal care and baby products. Both companies generate a lot of sales from China and are benefiting from rising demand for high-quality, reputable brands.

Asia Pacific remains a great long-term story. In the short-term, periods of volatility should not be ruled out and there may still be a better entry point. But this fund remains one of the best to build up a long-term holding. In what can be a volatile sector, a conservative, flexible approach seems sensible. This is exactly the type of approach adopted by First State and long-term investors will reap rewards.

 Mark Dampier is head of research at Hargreaves Lansdown



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