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Emerging key themes across Asia
Mayur Nallamala, Head of RBC Asian Equity and Senior Portfolio Manager gives his view on the top themes emerging across the Asian Market.
What themes are emerging across Asia that you are particularly excited about?
I think two of the biggest themes out there, one of them is a very global theme and one of them is a more localised theme. The global theme is AI and as with every big thematic that comes out the issue with a theme like this is that there's often a lot of hype, valuations can become very stretched so you have to be quite careful in how you try and get exposure.
That said, I think AI, even though it's been all the rage for the last year or so, it's still at a nascent stage of its development in terms of what we could get in terms of long-term investment exposure and there is still a lot of structural upside to the AI story. In Asia, we're quite fortunate in that we're involved in more the picks and shovels part of the investment story. It's the guys who are doing the supply chain the back-end sort of thing and there are some very interesting companies with very good exposure to the thematic which I think is still at reasonable valuations that we have quite a lot of interest in.
In terms of a more localised theme, it's more about corporate governance, and historically of some countries in Asia, particularly in North Asia, have struggled in terms of where they are in the corporate governance sphere versus Western markets, and this has resulted in a pervasive discount at that those stock markets trade out. Korea is the most obvious one. They actually have a moniker for it. They call it the Korea discount, but historically frankly so did Japan and part of that was due to the “lost decade” which became a lost two decades for Japan. China now I think is also facing a similar conundrum.
The interesting thing is there's been a decadal effort in Japan to improve corporate governance and that theme has slowly borne fruit and of late it's accelerated. That theme has meant that you've seen long-term issues in the Japan market structurally being addressed such as the unwinding of cross-shareholdings, the improvement of shareholder returns via other methods like share buybacks or share dividends.
This kind of things have resulted in a slow uplift to valuations for the market overall and companies that have committed themselves to improving shareholder return, and corporate governance initiatives in general, which have been done at a country level, the companies that have actually committed to have seen a much bigger re-rate. Companies that haven't have been ignored by the market or actually de-rated.
There is a cultural phenomenon at work here. There is a bit of a FOMO thing and people don't like being left behind so if Toyota, the largest company, starts doing something,g or if GPIF, the largest Japanese institutional investor says something, others do fall into line. That's what we've experienced over the last decade and that process is accelerating. It's one of the reasons, as well as a weaker yen and various other things, a normalisation of inflation, that has caused a very strong market reaction in Japan.
The really interesting thing is Korea, close neighbor of Japan, close competitor of Japan, also has FOMO and has decided that they're going to go down the same road. Some of it's political, it's very easy to be cynical about this because we've seen attempts to improve governance and shareholder return fall by the wayside in the past, but this is an initiative being driven by the government, and which corporates can actually benefit from because it improves their access to capital at better valuations.
This programme, which is being called the “value-up” programme, looks very similar to the Japanese experiment of the last decade and it's happening at breakneck speed and a lot quicker and it's just really come about in the last few months. You've seen a big re-rate already in some of the companies that could benefit if the Koreans move forward with this. That's a very optimistic development.
Longer term, I think despite all the problems with China, all the geopolitical issues, the structural issues within the economy, if they can start doing stuff like this as well and creating a narrative around improved returns for minority shareholders and an improved market structure, you could see similar things play out in China in coming years.
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