Investment in a Minute - Financials Appealing Despite Current Headwinds
1 min read 16 Mar 23
"Despite the headlines, we view the prospective returns in leading financial firms across the region to be appealing. This includes housing finance firms in India and mega-cap banks in Japan."
- Vikas Pershad, Portfolio Manager, Asian Equities
What are the 3 biggest opportunities and/or trends you are seeing right now?
- Financials: Despite the headlines, we view the prospective returns in leading financial firms across the region to be appealing. This includes housing finance firms in India and mega-cap banks in Japan. The recent dislocations have been enough that we have added to existing positions.
- Hospitals in India: The healthcare delivery landscape in India is transforming and many of the companies leading that transformation are now publicly listed. Relative to the size of the earnings potential on a multi-year view, valuations are reasonable; moreover, management teams are becoming more prudent with capital allocation and the government is supportive of the private sector in this space. Hospital bed penetration remains very low, unit capex is rising but not as rapidly as the ability of companies to price appropriately, and there is a long tail to growth across the country. In the diagnostics space, companies will need more time to emerge from the earnings lull that followed the Covid-related earnings spike – meanwhile, valuations remain full.
- Avoiding mega-cap tech in China. On balance, we see higher earnings growth and more scope for re-ratings elsewhere in China. There are some pockets of opportunity in this space, but broadly this sector of the market in China is less appealing than it has been in years.
Where do you think opportunities are most underrated and why?
- Small caps in Japan (across sectors) – in general, small caps are fertile grounds for long-term investors, globally. The reasons are numerous: the space is under-researched; comps can be few and liquidity is sub-optimal. But liquidity eventually finds quality. And in Japan, the corporate governance changes that are leading to more prudent capital allocation, disciplined M&A and streamlined cost structures are all leading to an opportunity set that is expanding each year.
- Semiconductor supply chain in South Korea and Japan – backed by public policy and the private sector alike, causes us to believe that the companies in this sector are positioned well to benefit from the continued tensions between the U.S. and China on this front.
- Consumer facing companies in China – the rise of spending power in China is likely to coincide with the shift toward domestic brands and retail chains; this shift is in its early innings.
What is keeping you up at night?
- Staying disciplined amidst the volatility and the wide-ranging opportunities we see.
- Thinking through the implications of the continued inflationary pressures on consumers beyond the top few percent of earners.
- Unintended consequences of the U.S. restrictions on supplying semi equipment to China.
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