A 4Factor Strategy to Unlock the Rich Potential of Asia Markets

Text size

This is a sponsored article from Investec Asset Management.

Asian markets are powering ahead with renewed confidence in 2018. They have started the New Year in a mood of buoyant optimism after the year-end saw them rise more than 50% from their 2016 lows.

The sound foundations of Asia’s stellar 2017 market performance were productive growth and a cut in capital expenditure by companies in the wake of a bruising earnings recession which triggered fundamental change and a huge improvement in free cashflow.

Crucially, the rise in free cashflow in Asia – outstripping that of the US last year for the first time since 2005 – has been driven by an improvement in margins and capital efficiency, reflecting a longer-term improvement in the quality of Asian companies.

While the new economy continues to take reshape businesses across Asia and China, however, the rich potential of the markets remains relatively untapped by an arguably myopic and overly wary global investment community.

Giant Strides
The exceptional performance of Asian indices in 2017 was steered to a large extent by four corporate heavyweights, which between them have accounted for more than half the index growth.

But this apparent imbalance may have diverted investor attention from the underlying improvements in the Asia markets recovery which, on closer inspection, are more broad-based that stock market movements indicate.

Significantly, quality of earnings growth has been high, driven by sales growth and margins compared with buybacks and acquisitions which have dominated in developed economies.

With both sales and margins improving, this shows not just good cost control but also an element of pricing power which suggests continuing improved operating leverage into 2018.

Equitable Appeal
China equities offer one of the highest revenue, earnings, and cash flow growth opportunities globally in 2018 as the country’s economic growth shifts from investment-heavy sector to more sustainable and shareholder friendly sectors.

Despite their dynamism and rapidly modernising economy, however, China equities still trade at a large discount to developed markets and the international investment community remains extremely underweight on Chinese equities.

China’s progressive new economy companies are continuing to flourish as the country moves rapidly up the technology curve, determinedly accelerating its investment in research and development.

The domestic equity market is viewed as rich with long-term alpha opportunities, as it is under-researched and is largely driven by domestic retail investors who tend to have a shorter investment time horizon.

Investec Asset Management (‘IAM) believes that investors who have a disciplined bottom-up stock selection process and are willing to adopt a longer-term view and stomach the higher volatility could be richly rewarded in the long term.

Intelligent Foresight
The Investec Asian equity strategy and the Investec All China equity strategy employ a disciplined bottom-up investment process called 4Factor which looks to identify and realise the best growth opportunities across the region and in China.

IAM has a deep understanding of the behavioural impact on investing and has designed its 4Factor investment framework to minimise propensity to bias and to study companies in a consistent and repeatable manner.

From a broad universe, the investment framework begins with a quantitative screen that evaluates companies and highlights potential based upon four investment criteria: strategy, value, earnings, and technical aspects.

IAM’s team of Asia and China specialists put this approach to effective use in 2017 when growth stocks drove performance and opportunities became more expensive and crowded as the year wore on.

It unearthed opportunity in cheaper, unloved sectors which saw the largest improvements in terms of earnings upgrades and quality improvements and, in the case of state-owned enterprise, signs of reform.

As a new year dawns with positive signs of continuing growth, IAM believes there are outstanding opportunities and good reason to believe Asia will carry on outperforming, even if the seven-year bull market in developed markets comes to an end.

To find out more about the Asian equity strategy and the All China equity strategy as well as the 4Factor investment process, click here.



The information discusses general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market forecasts presented herein reflect our judgment as at the date shown and are subject to change without notice. These forecasts will be affected by changes in interest rates, general market conditions and other political, social and economic developments. There can be no assurance that these forecasts will be achieved. Past performance and forecasts should not be taken as a guide to the future, losses may be made. Investment involves risks: Investors are not certain to make profits. The information contained in this document is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This communication is provided for general information only and is not an invitation to make an investment nor does it constitute an offer for sale. This is not a recommendation to buy, sell or hold a particular security. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. The securities or investment products mentioned in this document may not have been registered in any jurisdiction. In Hong Kong, this document is issued by Investec Asset Management Hong Kong Limited. This document and the company website have not been reviewed by the Securities and Futures Commission (SFC). In Singapore, this document is issued by Investec Asset Management Singapore Pte Limited (company registration number: 201220398M).

This is a sponsored article from Investec Asset Management.

Related Tags