@ a glance newsletter
Stronger Asian businesses offering new opportunities for investors
(December 2010)
Q&A with Karma Wilson, Head of Asian Equities
You’ve just returned from a trip to China where you had a chance to speak with some business leaders and government authorities from the region.
That’s right, I recently went to China with some of my team. We visit companies in the region about ten times per year and the visits help us to see first hand the type of activity in the region. It also helps us understand the companies in the context of their operating environment and the impact that market trends, economic conditions and government regulations are having on them.
One of the overall assessments of our visit is that the quality of growth in the region has really improved. What I mean by that is that the companies performing well are really world class companies and a lot of the smaller, less efficient operators have left the market or been bought out by the stronger ones.
What does that mean for investors?
The consolidation is really a positive for investors because it means that their investment, not withstanding future changes, is with companies better equipped to manage future market trends or downturns. As an example, if you take a look at the air conditioning sector, in the past there were a lot of small air conditioner manufacturers but today there’s just three companies dominating 80% of the market.
Can you explain why this consolidation has occurred?
Well there are a number of factors driving the change, but within China at least, the government has introduced new environmental and energy efficiency standards that really require some scale to implement. A lot of the smaller companies didn’t have the capacity to meet the new standards and either had to be bought out by bigger companies or close down.
What do you think the emphasis on environmental standards means for future growth in China?
I think the new regulations show that the Chinese government doesn’t believe that pursuing growth at any cost is a long term viable solution. They’re looking for sustainable ways to maintain their economic growth, and the new regulations are one way of protecting their position as one of the world’s best performing economies. For investors looking beyond short term gain the new regulations are something of a reassurance really.
You mentioned earlier that your visits to the region allow you to see how government affects the operating environment of businesses, can you share with us any observations from your most recent trip?
Well during our most recent visit we spent a lot of time in central China, which is where the more domestic oriented companies are based, as opposed to the coastal areas, where the more export oriented companies are based. What I found really impressive was the obvious investment in infrastructure to facilitate business in the central China region. We caught the bullet train from Changsha to Wuhan which is meant to be the fastest in the world. We were traveling at over 300km/h and it was incredibly smooth and efficient. Despite the 360km distance it took us only 1hr20mins to get there.
The other important thing to mention, in relation to the growth of domestically oriented companies, is that it has the potential to mitigate against reduced revenues from exports as the demand for consumer goods from developed economies dampens.
What about outside of China, can you give us your observations about the rest of Asia?
One of the important things is that the growth is integrated across the region. Countries across Asia are building industries to act as the regional supply chain. Indonesia, for example, benefits as a supplier of coal to China and Taiwan and Korea supply technological and industrial goods.
Another strong performer in the region is India. In India their own service sector has really pushed their growth in recent times. One of the things to note about India is that they have a young demographic which means they have an inbuilt capacity for a bigger workforce and unlike a lot of other countries they don’t have the burden of managing an ageing population.
What would you say to investors not already investing in Asia?
Asia represents a significant part of the global economy and is one of the fastest growing regions in the world. Investing in Asia does involve exposure to emerging markets which can be volatile, but the appeal for investors with an appropriate risk appetite, is that the importance of the region is likely to grow for decades. I’d say progressive investors are likely to consider an allocation to this asset class in order to take advantage of the opportunities the region offers to enhance their returns.
Find out more about the AMP Capital Asian Equity Growth Fund.
