Investor Dialogue

Investor Dialogue: David Gaud

Edmond de Rothschild Asset Management’s senior portfolio manager for Asia talks about stock picking in Asia.

What is your view on the Asian IPO market so far this year?
There are meaningful differences from one country to another across the region in terms of IPO’s outcome. North Asia has faced a difficult situation in terms of IPOs, especially in Hong Kong.

We’ve seen tentative deals, which have not come through because of the lack of appetite.

In other countries, mostly in Southeast Asia, we’ve seen a good response and it’s interesting to see that two of the three largest deals globally so far this year took place in Malaysia.

The Philippines is also a market where we’ve seen relatively good demand, and post-IPOs, stocks have done relatively well. Singapore is more of a mixed bag.

Indonesia was relatively quiet from what I can tell.

For North Asia, I’d say it’s in line with the rest of the world.

There is a lack of appetite for new assets and companies that do not have a strong track record. People are relatively cautious.

What’s happening in Malaysia?
The big deals — one that took place already, Felda Global Ventures, (which was listed on June 28) and IHH Healthcare whose trading debut was July 25 — are state assets that are semi-privatised. They benefit from strong state support, and they are quality assets. So they attract a lot of interest from domestic investors and we’ve seen also very good demand from cornerstone investors.

Now, I think it’s worth mentioning a few points. The first one is that one reason why those deals are doing well is that there are a lot of uncertainties in the Malaysian market this year, especially the coming elections, which have not been set. (The general elections are due in 2013.) It’s not very clear whether the current majority will win those elections, and if the current president and the government will remain in power. In the meantime, I think there are a lot of expectations that the current government is going to put in place measures supporting consumption, and that it will try to make the equity markets provide decent return. So I think there’s a positive spin there. Rather than going in and buying existing companies, you basically participate in the IPOs of good quality. You align your interest with the interests of the state, and so you feel relatively comfortable.

It is worth mentioning that the IHH deal could be, as far as I can tell, the last, for now, of good quality. That means that there are a few more deals coming and some of them are of decent quality, but others seem to be more questionable.

Whether we’re going to continue to see strong demand for Malaysia deals during the next six months, I’m not sure.

On top of that, as we get closer to the elections, people will get nervous.

And if one remembers what happened in 2008 postelections, the market came down quite significantly. The uptrend may continue with the IHH deal, but beyond that it’s going to be more challenging; the quality of assets doesn’t seem to be so good.

At the same time, it makes perfectly good sense to see lots of cornerstones on those big existing deals because they have aligned themselves with the state.

Do you think the trend to have a large number of cornerstone investors on each deal will continue in Malaysia? (Felda had 10 cornerstone investors and IHH secured 22 cornerstones for their IPOs.)
I think when you have lots of uncertainty in the market, when you’ve got good opportunities, with all the qualities that I mentioned, I think for a lot of large investors it makes sense to concentrate their investment activities on those specific deals. So you tend to make bigger bets with quality names, rather than spreading your investments among less good-quality names. It will all depend on what is on the offer.

Again, my perception moving forward is it’s going to be a bit more difficult.

I think at the same time, global institutions have to remain invested. So they’ve got to find opportunities.

When you do a screening and review across the region, that type of deal is definitely an interesting one because you’re among large institutions and you’re among sovereign wealth funds. In a sense, you’re protecting yourself better versus the volatility and short-term players, and you stand a better chance that those deals will perform well.

What’s the outlook for the region?
In Malaysia, at this stage, it’s difficult to see what is going to come next. In the Philippines, there are quality assets that are still being listed ­ they are private assets but with a good track record and good corporate governance. The same goes for Indonesia as well. “The beauty of the Hong Kong market is it’s very often excessive on the downwards and the upwards” For China, it’s much more driven by the momentum. We know that in the A-share market, lots of deals are in the waiting. But considering the A-share market is back to its 12-month low, it’s not easy to attract interest.

The problem historically with Hong Kong is that cornerstones are not as active on a relative basis as they are in say, Malaysia. The market is a lot more volatile in part because you don’t have domestic sovereign funds supporting the market.

I think another thing is that a lot of quality assets in China have been listed already. Most sectors are already well represented. It’s not like Malaysia or the Philippines where you still have clear leaders like IHH being listed.

So the quality of assets is less attractive. But this can turn around very quickly — the valuation of the Hong Kong market is now relatively low by historical means and we could tell a completely different story in six months time.

That’s the beauty of the Hong Kong market — it’s very often excessive on the downwards and the upwards. Right now, it’s downwards, but if liquidity were to flow in again, we will see deals coming, not just Chinese assets but international assets.

Which are your preferred markets?
We’re still very much positive on the Philippine market and Indonesia. We’re positive towards China for the valuation. It’s difficult again to say exactly when things will bottom and when it will start to turn around, but this is in all sense a historical good entry point. And we’re turning more positive on India — it’s been getting attractive for the past month and a half to two months. The downgrades in earnings took place already, and the collapse in commodity prices is a bit positive for India. And the weakening currency is initially negative, but to buy assets with the weak currency is actually a very good opportunity. We’re actually warming up to India, which means in the end we’re quite positive on the main engines — China and India.

We’re quite positive on a number of Hong Kong stocks, but these Hong Kong stocks have strong activities in China. So not so much on pure, exclusive Hong Kong names because there aren’t many of them, and we tend to treat those Hong Kong names we invest in as China, or regional players. We’re not so keen on Hong Kong developers, for instance, or pure Hong Kong banks. Actually we don’t like banks in general, especially in China right now. We’re much more positive on non-banking financials such as insurance, stock brokers, stock exchanges.

Which market do you feel the least hopeful?
We’ve been historically underweight Taiwan because in itself, this is not a market that is providing strong prospects for the next ten years. Yet, this is an important market for the tech sector. The country perception is not strong, while the tech aspect is very important within the region. Does it make sense to be massively overweight Taiwan only if you want to be massively overweight the tech sector?

Singapore falls into the same category — this is a stock picking market.

Which sectors/stocks do you like the most?
We’re still very positive on the consumption segment. We’ve been taking some profit on or lowering weighting on the discretionary consumption and we’ve been switching some of the investment into staples.

Consumption staples last year had a very difficult year, with the top-line under pressure and a deteriorating margin because of very high raw materials costs. This year is a different story because the top-line is holding up better than other segments — we all still need to buy food and basic products. At the same time, a sharp drop in raw materials is actually going to provide a margin expansion for those companies in coming quarters. And by historical means, they were trading at a relatively low valuation early this year. They’ve been holding up quite well so far, and they are delivering what we’re expecting from them.

They tend to be good quality names, and still with growth potential. They offer all the key factors that you’re looking for when we’re in a relatively difficult environment.

Another interesting point about this segment is that you’ve got opportunities all across the region. So you can diversify your investments.

You’ve got names in Korea and Taiwan, which are doing very well, in the Philippines, China or even India now. You’ve got regional plays, which are interesting.

1 While the major IPOs that came out of Malaysia this year were good, be selective
2 Look to Indonesia, the Philippines and India for opportunities
3 Singapore and Taiwan are stock-picking markets


This article first appeared in the August issue of FinanceAsia magazine

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