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Positive sceptic

With so much bad news to digest in the West, the increasingly bullish consensus on Asia and emerging markets is easy to understand.

But most of the best-performing managers in these areas are of a more naturally defensive nature and Schroders’ Robin Parbrook sits comfortably in that camp.

Based in Asia for more than two decades, he is currently positive on stockpicking opportunities across the region but dismisses many of the broader macro assumptions that have become received wisdom.

Primary among these is the notion of decoupling and Parbrook asserts that while Eastern economies may have untangled themselves from the West, stockmarkets remain resolutely global.

“If you look at economic fundamentals, Asia is clearly in better shape than the West, with better demographics, healthy consumers and no mass deleveraging to face. Despite all that, the idea of stockmarket decoupling is a myth,” he says.

“People talk about domestic demand as a big theme in Asia and although it is in a macro context, consumer stocks only make up a small part of these markets.”

Parbrook is not wholly bearish on China but is deeply sceptical of claims it can come the world’s rescue again, as it did to some extent in 2008, citing the country’s ever-growing credit to GDP levels, particularly if you factor in the shadow banking system.

“The macro case for China is clear but we are stock-market investors and if you look at the MSCI China index over the last 20 years, it has been hard to make any money. A big proportion of stocks in the benchmark are state-owned and therefore not concerned about creating shareholder value, with just 10 per cent in consumer names linked to domestic demand.”

Looking at other figures, Parbrook notes demand for cement in China is above its all-time high and five times that of the US, suggesting it has only one way to go.

He is also cautious on Chinese banks, concerned about just how much in non-performing loans they have taken onto balance sheets. He says: “This shows stock-market growth does not correlate with GDP and China cannot provide the offset to slowing global growth.

“At present, cashflows among companies are deteriorating as capex spending is booming, which is a worrying sign.”

Elsewhere in the region, Parbrook is also negative on Korea, citing falling returns on equity across the markets and high cyclicality.

“Along with Taiwan, Korea is the most cyclical market in Asia and has a traditionally poor record on dividends, with payout ratios as low as 15 per cent and 25 per cent withholding tax recently abolished,” he says.

“What this adds up to is a country that is extremely cyclical, destroys value and has enacted policies geared to stop dividend payments, which hardly adds up to an attractive package.”

On Korea, Parbrook says a look at the country’s analyst community is illuminating, with 27 buy recommendations for every sell.

The ratio only drops to 23:1 in China and Schroders tends to underweight countries where consensus verges on perma-bullishness.

On his Asian total return fund, apart from Chinese banks and cyclicals in general, Parbrook is also underweight areas where companies are competing with state-owned enterprises.

“Sectors such as wind or solar power are strategically important for the government in China to improve its emission profile so the state-owned players will have major advantages over private peers, such as free access to capital,” he says.

On the more positive side, Parbrook likes Singapore and the Asean markets in general, seeing good opportunities in selected consumer names such as Siam Makro.

After the BP Gulf of Mexico incident last year, he says it is increasingly difficult to get insurance on old oil rigs and is therefore also positive on rig building companies such as Keppel and SembCorp Marine.

Overall, he says Asian markets still look relatively expensive on around 1.6 times price to book but the group is a strong advocate of mean reversion and he would happily buy at 1.2 times, particularly while central banks continue flooding the world with money.


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