Capturing alpha in Asia ex-Japan small caps even in stormy markets

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This is a sponsored article from PineBridge.

Volatile markets and a delicate global macro-economic environment have kept some investors on the sidelines. But the economic cycle should not be a barrier to opportunity, says PineBridge Investments.

Despite prolonged trade tensions and macro-economic drags, Asia remains the fastest-growing region in the world1, and its rapid technological development and adoption, a large population with rising incomes, and growing intra-regional trade are set to drive its continued economic ascendance.

Active stock-pickers at PineBridge Investments see an abundance of opportunities in the largely underresearched Asia ex-Japan small-cap equity market to find companies that can capitalise on these long-term growth drivers. Such companies are involved in infrastructure, automation, energy and the environment, and consumption. They tend to be more regionally focused and niche and, therefore, more resilient against global demand shocks.

“The Asia ex-Japan small-cap space is a big pond with a lot of fish, and interestingly, not many fishermen,” says Siddhartha Singh, investment director, Asia equities at PineBridge Investments.

“As technology changes business models, the ownership of the profit pool in an industry changes hands. New winners are emerging in a region that is large but relatively uncrowded.”

Asia ex-Japan small-cap valuations are reasonable after having fallen last year, and operating margins are expected to increase.

Operating margins are forecast to continue rising (%)

Source: Bloomberg, as of 9 May 2019. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Past performance is not indicative of future results. Any forecast presented herein are valid as of the date indicated and are subject to change.

Stock selection drives outperformance

When casting its net for opportunities, PineBridge follows a rigorous bottom-up approach to stock selection, seeking the best-quality companies across countries, sectors, and market cycles.

“We believe investment opportunities exist across the entire market spectrum and at every point in the economic cycle. We focus on the dynamic nature of companies over their lifecycle in order to select highly distinctive, alpha-generating stocks irrespective of whether they are part of benchmarks. The strength of the business model, the people running the business, and the valuation to be paid are the three most important criteria that drive our conviction,” explains Singh.

Although they were amongst the worst-performing markets in the region last year, China and Hong Kong were overweight in PineBridge’s Asia ex-Japan Small Cap Equity Strategy and were the best contributors to performance. Singh says this demonstrates that good stock selection has the potential to trump market fluctuations.

Looking beyond macro

Global markets remain jittery but PineBridge considers this a potential opportunity rather than a concern. Singh cites an example of how investors could have missed an extraordinary opportunity if they focused only on the macro.

“During the global financial crisis, in mid-2007 to mid-2008, Apple launched the first and second generation iPhones, which benefited a number of original equipment manufacturers and suppliers in Asia,” explains Singh.

“However, focusing solely on the financial crisis would have led to a missed opportunity, so we focus more on understanding companies rather than looking solely at the pure macro backdrop.”

With global markets likely to remain volatile in the short term, any earnings deterioration or share price declines are viewed as a chance accumulate good-quality names as long as their basic earnings franchise is not irreparably damaged.

Price-value gaps will eventually correct, and investors could use this opportunity to build their allocations to Asia small caps, Singh adds.

To explore the opportunity in high-conviction investing with PineBridge’s Asia ex-Japan Small Cap Equity Strategy, please visit PineBridge’s strategy page.

1 IMF, as of March 2019.

Disclosure Statement

PineBridge Investments is a group of international companies that provides investment advice and markets asset management products and services to clients around the world. PineBridge Investments is a registered trademark proprietary to PineBridge Investments IP Holding Company Limited.

For purposes of complying with the Global Investment Performance Standards (GIPS®), the firm is defined as PineBridge Investments Global. Under the firm definition for the purposes of GIPS, PineBridge Investments Global excludes some alternative asset groups and regional legal entities that may be represented in this presentation, such as the assets of PineBridge Investments.

Readership: This document is intended solely for the addressee(s) and may not be redistributed without the prior permission of PineBridge Investments. Its content may be confidential, proprietary, and/or trade secret information. PineBridge Investments and its subsidiaries are not responsible for any unlawful distribution of this document to any third parties, in whole or in part.

Opinions: Any opinions expressed in this document represent the views of the manager, are valid only as of the date indicated, and are subject to change without notice. There can be no guarantee that any of the opinions expressed in this document or any underlying position will be maintained at the time of this presentation or thereafter. We are not soliciting or recommending any action based on this material.

Risk Warning: All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. If applicable, the offering document should be read for further details including the risk factors. Our investment management services relate to a variety of investments, each of which can fluctuate in value. The investment risks vary between different types of instruments. For example, for investments involving exposure to a currency other than that in which the portfolio is denominated, changes in the rate of exchange may cause the value of investments, and consequently the value of the portfolio, to go up or down. In the case of a higher volatility portfolio, the loss on realization or cancellation may be very high (including total loss of investment), as the value of such an investment may fall suddenly and substantially. In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved.

Performance Notes: Past performance is not indicative of future results. There can be no assurance that any investment objective will be met. PineBridge Investments often uses benchmarks for the purpose of comparison of results. Benchmarks are used for illustrative purposes only, and any such references should not be understood to mean there would necessarily be a correlation between investment returns of any investment and any benchmark. Any referenced benchmark does not reflect fees and expenses associated with the active management of an investment. PineBridge Investments may, from time to time, show the efficacy of its strategies or communicate general industry views via modeling. Such methods are intended to show only an expected range of possible investment outcomes, and should not be viewed as a guide to future performance. There is no assurance that any returns can be achieved, that the strategy will be successful or profitable for any investor, or that any industry views will come to pass. Actual investors may experience different results.

Information is unaudited unless otherwise indicated, and any information from third-party sources is believed to be reliable, but PineBridge Investments cannot guarantee its accuracy or completeness.

PineBridge Investments Europe Limited is authorised and regulated by the Financial Conduct Authority (FCA). In the UK this communication is a financial promotion solely intended for professional clients as defined in the FCA Handbook and has been approved by PineBridge Investments Europe Limited. Should you like to request a different classification, please contact your PineBridge representative.

Approved by PineBridge Investments Ireland Limited. This entity is authorised and regulated by the Central Bank of Ireland.

In Australia, PineBridge Investments LLC is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) in respect of the financial services it provides to wholesale clients, and is not licensed to provide financial services to individual investors or retail clients. Nothing herein constitutes an offer or solicitation to anyone in or outside Australia where such offer or solicitation is not authorised or to whom it is unlawful. This information is not directed to any person to whom its publication or availability is restricted.

In Hong Kong, the issuer of this document is PineBridge Investments Asia Limited, licensed and regulated by the Securities and Futures Commission (SFC). This document has not been reviewed by the SFC.

In Dubai, PineBridge Investments Europe Limited is regulated by the Dubai Financial Services Authority as a Representative Office.

In Germany, PineBridge Investments Deutschland GmbH is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).

In Switzerland, PineBridge Investments Switzerland GmbH is authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

PineBridge Investments Singapore Limited is licensed and regulated by the Monetary Authority of Singapore (MAS). In Singapore, this material may not be suitable to a retail investor and is not reviewed or endorsed by the MAS.

Last updated 4 March 2019

This is a sponsored article from PineBridge.

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