Following Japan’s recent success in implementing corporate reforms to improve equity markets in 2023, Eastsprings Investments held a webinar for experts to discuss their insights on the potential re-rating of the Asian equity markets.
“Asian equities are currently trading at a 50% discount to global equities on a price-to-book basis,” says Eastspring Investments.
The global asset manager, which is part of the Prudential group, anticipates that this gap will continue to narrow given government efforts around the region to introduce new programmes geared at increasing profitability.
“It is very encouraging to see Japanese-like market reforms spread through Asia,” says Sundeep Bihani, Eastspring’s lead portfolio manager for regional Asia equity strategies, adding that governments in South Korea, China and India are now focused on the need to improve capital returns to shareholders, protecting their minority stakeholders and improving the value of the various sectors in the market.
Speaking at Eastspring’s webinar on April 9, Bihani notes that action in South Korea has been taken to address the “Korean discount” through the country’s most extensive set of reforms so far. These steps include increasing dividend payouts and yields for minority investors, and share buybacks from various companies. The government is also introducing index exchange funds, which will only buy high dividend-paying companies, as well as tax reforms to incentivise companies to pay more dividends.
“This is pretty encouraging to see in a market that is historically less minority investor friendly,” says Bihani.
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SOE reforms in China
China is also on the move to introduce new reforms focused on state-owned enterprises (SOEs).
“China’s State-owned Assets Supervision and Administration Commission of the State Council (SASAC) talked about making market value management a key performance indicator (KPI) for listed central SOEs and a policy priority,” says Bihani.
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China is focused on improving the earnings quality and profitability of its SOEs as it attempts to narrow the devaluation gap between SOEs and private sectors. Its government has since started to include KPIs for the management of SOEs, an ongoing theme in China’s reforms for the past ten years.
One opportunity seen in Chinese companies is in their operating cash flows, which continue to be strong and are piling up on the balance sheet, notes Bihani.
“By encouraging companies to pay more [dividends], what’s happening is that the government and minority investors are benefiting. Balance sheets also become stronger than before. All these lead to better return on equity (ROE),” he adds.
To be sure, the payout ratio in 2020 for SOEs stood at 45%. This has since increased to 55% in FY2023.
“These are the small changes that these small companies are making, but that is a big change when the dividends come into the pockets of the investor base, which includes [Eastspring’s] investors,” says Bihani.
Chinese companies can also conduct more share buybacks in a bid to increase value. According to Bihani, Chinese companies within the MSCI index have conducted buybacks that amount to two times more than the whole of 2022.
While this is just the beginning of the year, the initial signs are “encouraging”, he says.
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“When you do higher dividend payouts [and] when you do buybacks, there’s a possible feedback loop. Because what happens, is that the ROE in these companies improve. This, in turn, leads to better share prices and gives management better confidence that their [changes] are being rewarded,” he adds.
While head of equities Michelle Qi notes that most investors critique Chinese policies as being “behind the curve”, she explains that China has been seeing positive signs of recovery recently.
“Consumer confidence has come back, we have started seeing signs of recovery not only in manufacturing but in China’s consumer base as well,” says Qi.
The Indian urbanisation story
Anish Tawakley, deputy chief investment officer, equity, at ICICI Prudential Asset Management Company, provides his insights on the Indian urbanisation story to answer the question of the possible upside for the Indian equity market.
With increasing urbanisation and homebuilding in India, Tawakley notes that the manufacturing sector stands to benefit from this movement.
Greater demand for real estate created by urbanisation will overflow into other sectors such as manufactured goods and electrical appliances.
“There is an upside potential from urbanisation,” says Tawakley.
Additionally, companies in infrastructure development are similarly impacted by urbanisation. With the increasing demand for public services, construction and utility providers, these sectors will benefit from government initiatives towards the urbanisation project which further drive up shareholder returns.
An additional upside to the Indian urbanisation story is job creations achieved through activity from the manufacturing sectors. Tawakley notes that with construction being one of the largest job sectors in India, the urbanisation movement can help to solve employment issues.
Sectors which might benefit from the reforms
The SOEs are one of the sectors which might benefit from the reforms, says Bihani, as they are under the biggest influence of their respective governments.
“These are the companies, big companies, which were earlier busy with investing for the growth of the economy. Now, they have spare cash and they can release it,” he adds.
The other set of companies are professionally-managed ones that are not family-owned or have no one big shareholder.
“Small swings in incentive or tax benefits or listing benefits makes them go for higher payouts or maximising their balance sheet,” he says.
Investors should also look at companies with strong fundamentals, companies which are sitting on sub-optimal balance sheets.
“You can find them in the financial sectors, as well as consumer and commodity sectors,” he says. “To give you an example, Korean financials create almost a fraction of their peers in other markets in price to book. Can change happen there? Yes cause the government is promoting it, the banking regulator is supporting it. Is it priced in the market? It isn’t. Hence, the risk reward is in your favour.”
Amid the sexy-looking, news-making counters, Bihani advises investors to “stay away from glamour and high growth".
Instead, investors should shed existing market biases and take on disciplined views towards identifying “good and decent” businesses trading at relatively lower share prices.
