How can investors identify promising Emerging Markets? Watch where the tourists go, says Pendal’s PAUL WIMBORNE

• Tourism data provides a useful EM snapshot
• Mexico a standout, Thailand in a slump
• Find out about Pendal Global Emerging Markets Opportunities fund

WHEN investing in Emerging Markets, consider going where the tourists go.

That’s the message from Paul Wimborne, who co-manages Pendal’s Global Emerging Markets Opportunities Fund.

For Paul and his EM team, investing starts at country-level – which means a lot of time spent sifting through national data before deciding where to invest.

One of the best indicators of the health of a country is its tourism levels, he says.

A strong tourism sector creates jobs, boosts local economies, adds to government revenue and foreign exchange earnings, as well as improving the cultural exchange between countries. It signals opportunities for investors in emerging markets.

This is borne out by comparing the tourism sectors in Mexico, one of the better performing emerging economies, and Thailand, says Wimborne.

Both countries rely on tourism and facing similar challenges – reduced capacity among airlines, airport chaos as operations ramp up again, and rising oil prices.

But there is pent-up demand internally and externally, post-Covid lockdowns.

The outlook for the two countries is very different.

“The best tourism news is coming out of Latin America, and particularly Mexico,” Wimborne says. “Passenger traffic is already back to pre-COVID levels in Mexico. That not really a surprise when you consider that tourism in Mexico depends on the United States consumer.

“In the US, consumer confidence is pretty good along with employment conditions. Extrapolating the tourism sector, Mexico is the bright light within emerging markets.”

In contrast, many Asian economies, reliant on China, are struggling to re-emerge from the COVID pandemic.

“If you take Thailand, there were just over 3 million visitors in June 2019, before the pandemic. Pre-COVD tourism contributed about ten per cent of GDP. In August 2022 there were 1.17 million tourists in Thailand,” Wimborne says.

“The missing tourists are mostly from China and other Asian countries. That’s because many Asian countries, including China, are trying to minimise the effects of COVID, and are following zero-COVID strategies. Outbound tourism from China is essentially zero.”

There are emerging economies between Mexico and Thailand whose tourism markets fall in the middle.

“In Turkey, visitor numbers are just below the record level set in 2019. In Dubai, numbers are at 85 per cent of pre-COVID levels,” Wimborne says. There is a geographic trend in the health of emerging economies’ tourism markets.

“As you move east from Latin America through the middle east, and then into Asia, tourism markets worsen. In essence, Chinese tourists are the key lagging factor in international tourism recovery.

“Countries like the Philippines, Malaysia and particularly Thailand because of its reliance on tourism, are going to lag emerging markets in other regions. It’s going to take longer for some countries in Asia to recover, than in other parts of the world.”

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About Paul Wimborne and Pendal Global Emerging Markets Opportunities Fund

Paul Wimborne is a senior portfolio manager and co-manager of Pendal’s Global Emerging Markets Opportunities Fund with James Syme and Ada Chan.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here. 

The global commodity cycle could be beneficial for Brazil investors despite concerns over a national election, says Pendal’s PAUL WIMBORNE

• Markets nervous about Brazilian election
• But global commodity cycle looks helpful
• Find out about Pendal Global Emerging Markets Opportunities fund

A NATIONAL election is occupying the minds of Brazil investors but the real key to the country’s prosperity is the global commodity cycle, says Pendal’s Paul Wimborne.

Brazil’s powerful agriculture, energy and mining sectors have been among the world’s big economic winners from the supply squeeze in 2022. Consensus estimates for GDP and earnings growth have been revised upwards in the first half.

But with an election underway between candidates from opposite ends of the political spectrum, markets are starting to get nervous about the ramifications of a change of government.

An October 30 run-off vote is loomig between the incumbent, populist right-wing president Jair Bolsonaro, and former president and head of the left-wing Workers Party, Luiz Inácio Lula da Silva, who is leading in the polls.

Lula is leading Bolsonaro, with 49% of voter support against the incumbent’s 44% ahead, according to a poll last week.

“There’s two main risks the market is worried about,” says Wimborne, co-manager of Pendal Global Emerging Market Opportunities Fund.

“The first — which we are less worried about — is that Bolsonaro is already questioning the electoral system and setting the groundwork for a potential challenge.

“He is from a military background and his government has the support of the military. But we think Brazil’s institutions are strong enough to withstand any challenge.

“The second big risk that markets are pricing in is that Lula wins the election.”

When da Silva was last elected president in 2002, markets sold off sharply, fearing a big spending, left-wing agenda.

“Lula was seen as a hard-left candidate, but moved centre-left when actually took office,” says Wimborne.

“A large part of that was the timing of his presidency. His two terms in office, from 2003 to 2011, coincided with a commodity super-cycle that boosted export conditions for Brazil and provided him with a sound base to increase welfare spending and increase spending on social projects.

“It was an incredibly successful period for Brazil where they dramatically improved the lives of tens of millions of ordinary Brazilians.”

The next commodity super-cycle

Ironically, a similar story may play out again in 2022.

“We think that if Lula is elected, the commodity cycle could once again determine how much spending power he has and how successful his government will be.

“He will want to spend more on improving the lives of the lower classes in Brazil and whether he has that spending power will be determined by the export conditions and the commodity cycle.”

Right now, things look helpful.

High prices for energy, agricultural commodities and iron ore are boosting Brazil’s export earnings and lifting government tax revenue.

“It’s too early to say, but it may well be that if Lula is elected he could once again be very fortunate in the timing of the commodity cycle.”

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About Paul Wimborne and Pendal Global Emerging Markets Opportunities Fund

Paul Wimborne is a senior portfolio manager and co-manager of Pendal’s Global Emerging Markets Opportunities Fund with James Syme and Ada Chan.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here. 

As the world rebuilds supply capacity, investors have an opportunity to find companies that will benefit, says Pendal’s PAUL WIMBORNE

• Rebuilding supply capacity critical to solving inflation
• Old-economy stocks likely to benefit
• Find out about Pendal Global Emerging Markets Opportunities Fund

ECONOMISTS often see inflation as a demand problem that can be solved with higher interest rates and tighter fiscal policy.

But there’s another side to solving higher prices — lifting supply.

And as the world rebuilds supply capacity, investors have an opportunity to find companies that will benefit, says Pendal portfolio manager Paul Wimborne.

“If you can build up more supply in the long term that can also help to suppress inflation,” says Wimborne, co-manager of the Pendal Global Emerging Market Opportunities Fund.

“Whether that’s funded by governments or private companies, we’re finding opportunities at the moment in some portfolio holdings that are exposed to this trend and are experiencing very strong business conditions as a result of new investment in capacity.”

Wimborne says the opportunity is emerging because of a mismatch between investment over the past decade and the goods and services that the planet requires.

“There’s been lot of investment into technology, the internet and building out the digital infrastructure. But not a lot has gone into what we would call the old economy — energy and industry.

“We think that might be more of a focus over the next decade.”

Wimborne offers three examples of companies positioned to win from the reset.

China Oilfield Services

China Oilfield Services is a leading oilfield services supplier in the Chinese offshore oil industry and a major supplier to oil and gas major CNOOC.

“The Chinese government seems to be maximising domestic energy production, including offshore oil and gas,” says Wimborne.

“Energy is a domestic security issue for many countries now. China has realised that if they want more energy security in the short term, focusing on oil and gas production is probably the easiest way to do that.”

Wimborne says as a result, CNOOC’s plans to lift its capital spending by 15 per cent this year.

“China Oilfield Services will be a major beneficiary of that.”

Cemex

Cemex is a Mexican cement producer with production assets across many countries.

“The cement industry is seeing a lot of significant cost pressure through rising energy prices — it takes a lot of energy to make cement — but the demand environment remains very strong, so the company has had no trouble passing through these costs in price increases,” says Wimborne.

Cemex has seen volumes lift 16 per cent year on year, driven by strong demand in Europe and the Middle East.

“And Mexico, its biggest market, is seeing activity accelerating in the industrial sector and housing markets have picked up.”

The other driver is strong remittance flows.

“Money earned by Mexican’s working in the US has boosted demand for bags of cement, which are largely sold to individuals,” says Wimborne.

“In Mexico, when consumers have a lot of money, a popular activity is buying bags of cement and building extensions to their houses.

“And finally, the US itself is also a strong market for them at the moment with cement volumes up 9 per cent year on year.”

Larsen & Toubro

Larsen & Toubro is an Indian construction and engineering conglomerate with exposure in India but also across neighbouring regions, in particularly the Middle East.

”We’ve seen in their latest results a strong increase in the order book. About 74 per cent of their order book is domestic and the Indian government has a big focus on capex projects at the moment.

“India is benefiting from higher tax revenues and are using that to increase building out things like roads and railways.

“It’s quite skewed at the moment to government work, but we expect over the next few years as a result of inflationary pressures coming through that the private sector to start building that capex as well.”

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About Paul Wimborne and Pendal Global Emerging Markets Opportunities Fund

Paul Wimborne is a senior portfolio managers and co-manager of Pendal’s Global Emerging Markets Opportunities Fund with James Syme.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here. 

Micro-economic reforms have driven success in India, but other factors will determine if this is a long-term success story for investors. PAUL WIMBORNE explains

• India’s micro-reforms are powering growth
• “The kind of reforms” emerging markets investors should look for
• But several risks must be considered

A SERIES of important micro-economic reforms in recent years explains the success of the Indian economy, says mmerging markets fund manager Paul Wimborne.

The introduction of a national biometric identification system — the largest of its kind in the world — and the reformation of state-based taxation systems into a single national goods and services tax are paying dividends for both businesses and households.

“These are the kind of reforms you want to look for as an emerging markets investor,” says Wimborne, who co-manages Pendal Global Emerging Markets Opportunities Fund with James Syme.

“These are positive reforms that generate stronger structural growth. India has a very positive story going forward.”

Biometric benefits

India’s biometric national identity system has allowed hundreds of millions of people to access services like banking that they were previously locked out of due to a lack of documentation.

“In the past, if you were from a rural poor area it was very difficult to prove you existed because you typically did not have identification,” Wimborne says. “Once you can prove you exist you can enter the formal side of the economy like banking and taxation.”

This not only lifts economic activity, but it also cuts down on fraud in government payments.

Tax reform

Alongside providing documentation to its citizen, India also reformed its taxation system, moving from a series of state-based duties to a single national goods and services tax.

“Until about three years ago, moving goods from one state to another was like crossing an international border with taxes to be paid and customs checks. The national goods and services tax has removed all those inefficiencies,” says Wimborne.

“Rather than having a warehouse in each of the different states, a business can now have a nationwide distribution.”

The combination of a simpler national taxation system and the conversion of undocumented workers into tax-paying citizens has put a rocket under government revenue.

“In the period April to September this year, personal income taxes grew 28.7 per cent compared to the pre-COVID base two years before.

“Corporate tax collections increased by 23.8 per cent over the same period.”

This is allowing the Indian government to spend and top of its shopping list is big ticket capital expenditure aimed at further improving economic growth and quality of life.

“They’re spending on things improving drinking water and sanitation, building roads and railways, and development of rural areas.

“This is all very positive for future growth of India.”

The benefit of the reforms is also protecting the Indian economy against the economic risks facing much of the rest of the world. As strong oil prices and a high US dollar start to drive inflationary pressures in many economies, India is holding up well.

“The growth story is driving strong foreign direct investment which is holding up the currency. That means the imported inflationary pressures are much lower in India.”

This lowers the likelihood of future interest rate rises, further bolstering the economy.

Investors have been reaping the rewards. While the emerging markets index has been flat in US dollar terms in the year to date, Indian stocks are up 25.7 per cent.

The question for emerging markets investors is what risks are on the horizon.

Risks to long-term success

The biggest risk in India is that valuations have risen, says Wimborne.

“Valuations in India have always traded at a premium to emerging markets and that premium has grown larger over the last year.

“We shouldn’t be surprised in the current global environment where the market has been paying up for growth stories that India is benefiting from that, but valuations are something that needs to be watched.”

Still, right now earnings growth looks to justify the valuations. Indian stocks are trading at 24.1 times the next twelve months’ earnings, while earnings growth is forecast at 25.9 per cent. Over the last few months, earnings forecasts have been revised upwards.

The other risk factor is the oil price. India imports oil and rising energy prices tend to have a negative effect on its economy.

So, what could turn a few years of growth in India into the kind of multi-decade success story the world has long been waiting for?

Wimborne says the key is exports.

“Why don’t emerging markets always carry on and fulfil their potential? The answer is that as you grow, your consumers tend to want to buy more goods which sucks in more imports. You need to be able to pay for those imports.

“The question is whether India’s export side — both goods and services — can generate enough foreign exchange to be able to cover what will be increasing demand for imported goods.”

“If we looked in five or ten years time, that will be a key determinate of how sustainable India’s improvements will be.”

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About Paul Wimborne and Pendal Global Emerging Markets Opportunities Fund

Paul Wimborne is a senior portfolio managers and co-manager of Pendal’s Global Emerging Markets Opportunities Fund with James Syme.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here. 

China is teaching the world a portfolio construction lesson, reminding investors that geopolitical risk is an ever-present danger to valuations despite the apparent attractiveness of star stocks. Pendal’s Paul Wimborne explains  

• Geo-political risk remains an ever-present threat to portfolios
• Chinese crackdowns in tech, education a danger sign
• Investors should re-think bottom-up stock-picking approach

CHINA’s latest regulatory changes have taken some by surprise. But in a robust portfolio construction process, should geo-political risk ever be unexpected?

Geo-politics is at the top of that theoretical list of risks that investors know they need to think about, but all too often it gets overtaken by the magic of finding an exciting bottom-up investment opportunity.

Nowhere is this more evident than China, where fast-growing stockmarket darlings across sectors as diverse as education, ride-hailing and technology have suddenly seen share prices collapse due to government actions.

China’s latest regulatory changes comes as Beijing refocuses its national development goals around easing cost-of-living pressures for families and improving equality. Shares in Chinese private education companies inside and outside the country plummeted.

Should such events be unexpected?

“In the US we say, ‘don’t fight the Fed’. Well equally, you don’t fight the Chinese government – it’s a fight you are never going to win,” says Paul Wimborne, a senior fund manager for Pendal’s Global Emerging Markets Opportunities Fund.

Wimborne has long taken a different approach to emerging markets from global investing peers by starting the process with a consideration of top-down, country specific factors to determine what the investment environment looks like.

“We think there’s one specific factor that has been relevant in China: understand the direction that the Chinese government wants to take its economy – and therefore policy and regulation – and invest accordingly.

“You have to look at what the Chinese government wants to achieve and align yourself with that.”

China’s policy decisions over decades have borne this out.

Over the past 30 years, policy decisions to drive investment into coal fired electricity production triggered various boom and bust cycles in the profitability of Utility companies. Beijing controlled both the cost of coal and the price of electricity, carefully managing the profitability of the businesses involved.

“They wanted to build more power plants and so they allowed these companies to make more money. Once they had an excess of power, the opposite was true and margins came down.”

The pattern was seen again in the technology boom of the past decade as China decided it could not allow American tech giants like Google, Facebook and Amazon to own the global internet and so allowed the creation of its own tech sector led by Alibaba, Tencent and Baidu.

This also provided the Chinese government the additional benefit of access to the vast amounts of user data that the companies had collected.  

“That led to these companies growing very fast becoming very successful and globally competitive and lots of other Chinese internet businesses emerging, in many cases funded by the giants effectively operating as quasi private equity.

“And this led to a lot of complacency among global investors, and particularly US investors where a lot of these companies were listed.

“It was felt that the Chinese internet companies don’t have emerging market risk because they are growth companies.

“But we’ve always felt that the politics could always come back and cause a problem.”

Just under a year ago, the Chinese government started to shift its policy settings, seeking a much larger oversight over the way these big tech companies operate.

Partly, this is because the tech sector is an important part of the Chinese economy.

In the US we say ‘don’t fight the Fed’. Well equally, you don’t fight the Chinese government.

Paul Wimborne, senior fund manager, Pendal Global Emerging Markets Opportunities Fund

Partly, it is because the tech companies’ successful forays into payments and finance started to threaten government banking policy, one of the key levers Beijing uses to control the economy.

But it is now also becoming evident that Beijing is in a large part reacting to negative sentiment among the Chinese people about the effect these big companies are having on society.

Long working hours, characterised by the ‘996’ work culture (9am to 9pm, 6 days a week), and low job security for gig workers like delivery drivers are starting to become topics of discontent.

Related to this discontent is the recent crackdown on companies selling tutoring services to Chinese families.

“This is a very different kind of rebalancing of societal needs that’s coming through,” says Wimborne.

“China has very low fertility rate and they’ve been trying to encourage people to have more children.

“One of the biggest complaints as to why people aren’t having children is the cost of raising children, and in particular the cost of education.

“There’s fierce competition from parents for their children to do well in their exams, because those exams have a big say on whether they get into the right university courses and into the right jobs and there’s been a huge ramp up in the online provision of after school tutoring.

“The government has now decided that that is an unhealthy thing to happen, and that the quality of this education – because it’s geared to just passing exams – isn’t driving China in the right direction.”

News of the new policy triggered 90 per cent declines in the share prices of the top education companies, the most high-profile of which are listed on the NASDAQ.

The lesson for investors?

“Understand and align yourself to where the Chinese government wants to take its economy,” says Wimborne.

“We don’t think this makes China uninvestable and it doesn’t change how we look at China.

“These risks have always been present; they just haven’t affected the kind of high-profile sectors we are seeing now.”

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About Paul Wimborne and Pendal Global Emerging Markets Opportunities Fund

Paul Wimborne is a senior portfolio managers and co-manager of Pendal’s Global Emerging Markets Opportunities Fund with James Syme.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here. 

“It’s not easy bein’ green,” sang Kermit the Frog. But sustainable portfolio construction does get easier when investors take a global view, says Pendal’s Michael Blayney.

• Being green is best achieved thinking globally
• A multi-asset approach helps realise goals
• Find out more about Pendal’s Multi-Asset funds

“It’s not easy bein’ green,” sang Kermit The Frog. But when it comes to sustainable investing, taking a broad view of opportunities across Australia, Europe, North America and Asia can provide rewards well beyond the financial.

“In sustainable investing, you need to think about the global opportunity set,” says Michael Blayney, head of the Multi-Assets Investments team at Pendal.

“It gives you the ability to exclude some stocks, without overly impacting your portfolio, and there’s a good chance you’ll end up with a superior long-term return.”

Creating a sustainable equities portfolio using global stocks also allows investors to pick and choose the type of portfolio they want.

It might be based on companies that are making an impact on society. It might be based on a portfolio that excludes certain companies – tobacco companies or manufacturers of weapons, for example. Or it might be anything in between.

“There are many benefits that come from tilting a portfolio to place a greater emphasis on sustainability, from reduction of tail risks to better positioning the portfolio to benefit from the transition to a low carbon economy,” Blayney says, adding that sustainable investing is best done using a multi-asset approach, not just equities.

Part of the challenge sticking to single equity markets while investing sustainably is the lack of choice. If fossil fuel producers are excluded that may bias a portfolio towards other sectors.

In some markets, like Australian equities, fundamental active management is best positioned to mange portfolio biases. In international equities, the major portfolio construction implication is a lower energy exposure.

Some sectors necessarily lose out when screening is introduced, notably energy and utility companies. But in most other sectors, there are plenty of choices from clusters of stocks with similar characteristics, Blayney explains.

He uses fossil fuels as an example.

“Traditionally, the main benefit of fossil fuel exposure for investors was to provide some hedging against an unexpected increase in inflation.  

“But there are a range of assets available to a multi-asset manager which are correlated with fossil fuels and inflation but provide a more sustainable exposure. These assets can be used to retain the desirable aspects of fossil fuel exposure, without the undesirable tail risk and negative externalities,” he explains, highlighting the benefits of a multi-asset approach.

“When you go global, there are a lot of flavours to choose and you can tilt your portfolio to positive solutions,” Blayney says.

“Going global can also overcome benchmarking challenges in local markets. 

“Should investors continue to compare their performance to standard market capitalisation benchmarks or non-sustainable peers once they’ve made the decision to move sustainable,” he asks. “A benchmark should represent the available opportunity set and if this is modified by investors’ preference, the benchmark should reflect that.”

That needs a global marketplace.

About Michael Blayney and Pendal’s Multi-Asset capabilities

Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

The team — which also includes Stuart Eliot and Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Find out more about Pendal’s multi asset funds:

• Pendal Multi-Asset Target Return Fund
• Pendal Sustainable Balanced Fund
• Pendal Sustainable Conservative Fund

Contact a Pendal key account manager here

Michael is Head of Multi Asset for Perpetual Asset Management. In this role he is responsible for the suite of Multi Asset Funds and capital markets research.

Michael joined Perpetual in June 2014 and has 18 years finance industry experience. Prior to joining Perpetual Michael worked at JANA for 13 years, and held a number of positions across research, consulting and portfolio management, including Head of Investments, Implemented Consulting.

Earlier in his career Michael held a variety of positions at UBS, Morgan Stanley and Barclays Capital in both Australia and the United Kingdom.

Michael holds a Bachelor of Business (Economics and Finance) from RMIT University and is a Vincent Fairfax fellow.

Higher levels of regulation in Beijing could make big Chinese companies more attractive by raising barriers to entry in key industries. Pendal’s Samir Mehta explains

• Balancing risk, investors should consider ‘what could go right’
• China big tech may benefit from regulation
• Find out more about Pendal Asian Share Fund

A SELL-OFF in Chinese stocks in recent weeks left some (but not all) investors wondering if the risk of further regulatory intervention outweighed the opportunities of investing in the dynamic Chinese economy.

But Pendal’s Samir Mehta, who manages Pendal’s Asian Share Fund, cautions against walking away from China, saying focusing only on managing risk means investors can miss opportunities.

Beijing’s actions have sent shudders through global investment markets, as policies aimed at improving quality of life and relieving cost of living pressures send shares reeling and leave investors wondering what else might go wrong.

“It’s easy to ask yourself what can go wrong in an investment,” says Mehta. “But equally sometimes it is just as important to ask yourself what could go right?”

Counter-intuitively, higher levels of regulation from Beijing could lift the attractiveness of the big Chinese companies as investment opportunities by raising higher barriers to entry into key industries.

Mehta draws parallels with Europe’s 2018 introduction of tight data privacy regulations — the General Data Protection Regulation (GDPR) — which triggered a sell-off in shares of affected companies like Facebook and Google.

“In reality, what has happened is incumbents have been the most benefited from this,” says Mehta.

“Who has the money? Who has the army of lawyers? Do you think a small startup will be able to compete in an environment where the GDPR requirements are so onerous?

“The same thing is going to happen in China as this crackdown comes in.

“Who is going to be funding competitors to Tencent, Alibaba, Meituan or any of these companies?”

Mehta points out that commentators are criticising China’s intervention in the education industry in particular without considering that the kind of intervention Beijing is proposing would not be out of place in the playbook of western governments.

Beijing wants to reduce the cost of education to quell the community’s concerns about cost of living pressures by stopping companies profiting from tutoring based on the national curriculum

Similarly, there is a widespread clamour in the US to reduce the $1.5 trillion-plus in outstanding student debt, with some pushing to make America’s education system free.

“President Biden even went to the extent of saying that he was willing to write off $10,000 of debt per student,” says Mehta.

“It’s easy to ask yourself what can go wrong in an investment. But equally sometimes it is just as important to ask yourself what could go right?”

Samir Mehta, Portfolio Manager, Pendal Asian Share Fund

Mehta is also impressed by the high levels of competition between the big Chinese companies, which he says has the effect of creating stronger businesses.

Mehta says investors should pay attention to three key metrics to decide when the Chinese stock sell off has gone too far and if it might be time to buy.

“Equity risk premiums, liquidity and profitability — those are the three metrics that I’m looking at,” says Mehta

“Equity risk premiums reflect the negativity that starts to come in as people want a higher and higher discount rate because the risks have gone up.

“Liquidity matters because every Tom, Dick and Harry wants to sell out of China at the moment.

“On profitability, the government measures are going to impose costs on these businesses so the big question is could these be passed on to consumers because there are going to be fewer competitors that might give you a cheaper deal?

“Then finally, what will go right is that at some point in time people will realise that the incumbents are now in a significantly better position.”

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Find out about Pendal Asian Share Fund

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager.