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Schroders’ Parbrook: Asia isn’t as cheap as people think

Schroders’ Parbrook: Asia isn’t as cheap as people think

Blockbuster fund manager Robin Parbrook has warned investors that the Asian market is not as cheap as it may appear despite a prolonged period of poor recent performance.

In an investment outlook, Citywire + rated Parbrook, who runs the $2.1 billion Schroder ISF Asian Total Return and $3.45 billion Schroder ISF Asian Opportunities funds, said there is a strong belief in markets that Asia should be home to deep value opportunities. However, he said this is largely untrue.

‘The main question we keep getting asked by clients is “are Asian markets cheap?”.  Our response remains “not as cheap as you probably think”,’ he said.

'This has been treated with some incredulity given the disappointing performance of Asian markets this year and indeed for the last five years, where returns on the main MSCI All Country Asia Pacific ex Japan index have effectively been zero in US dollar terms.’

Parbrook said if investors remove banks and commodities from the related industries then the wider multiples are more in line with longer-term averages. Also, he said, quality consumer and domestic names are still trading at relatively expensive levels.

‘The problem remains that a combination of over-investment, excessive leverage, weak end demand and major technological disruption has, and is still, causing significant headwinds for Asian corporate earnings. This has caused a major compression in return on equity (ROE) in the region,’ he said.

‘To get a sustained recovery in Asian stock markets we are going to need better earnings and returns on invested capital. For this we are going to have to see a return of inflation and economic growth, and some creative destruction of excess capacity.’

His voice echoes that of fellow Citywire + rated Asia specialist Samir Mehta of J O Hambro. Mehta used his latest investment outlook to voice concerns about misallocation of capital in Indonesia, which was skewing investor perceptions in the region.

Cautious approach

Parbrook said his overall year-end view for Asia is one of caution, despite finding enough opportunities to remain fully invested.

‘Our caution stems from our view that deflationary forces and the sluggish global economy are headwinds for Asian stock markets,’ he said.

‘Deflation is also not good if you have excessive amounts of debt – significant leverage has been added since the Global Financial Crisis, particularly in the corporate sector in Greater China.

‘We do not see Asian stock markets enjoying a deflationary boom as sluggish investment and consumption mean return on invested capital (ROIC) is likely to remain under pressure. Asian stock market returns have been disappointing as too many companies focus on growth rather than ROIC.’

The Schroder ISF Asian Total Return fund returned 11.3% in US dollar terms over the three years to the end of October 2015. This is while the average manager in the Alt Ucits – Emerging Market Including Asia sector returned 13.27% over the same period.

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