Quality Growth Boutique

Asia Pacific Equities: A Rising Middle Class Fuels Consumption and Innovation

Viewpoint

Asia ex-Japan equities returned 37% in 2017, outperforming major global equity markets. The start of 2018 brought concerning headlines that weakened optimism on the region. Despite increasing concerns about the reality of a U.S.-China trade war, many companies in the Asia Pacific continue to show positive earnings growth and we believe are well-positioned to benefit from secular shifts. Durable, well-run businesses can successfully navigate through a variety of political and economic environments, and we believe there are many such companies to select from in the region.

Asia ex-Japan Equities vs. Major Global Markets

2018-08-13_mp_asia-pacific_chart1
 

Source: FactSet. Past performance is not indicative of future results.

China and India are Driving Global Consumption

Shifting demographics of middle class consumption from traditional developed markets – the U.S., Europe, Japan – to the emerging markets creates a tremendous opportunity for companies serving those consumers.

Globally, demand from the middle class is expected to grow from USD 21 trillion to USD 56 trillion by 2030, with over 80% of the growth in demand expected to come from Asia.

Share of Global Middle Class Consumption

(2000-2050e)

2018-08-13_mp_asia-pacific_chart2
 

Source: The Organization for Economic Cooperation and Development (OECD)

The Vontobel Fund – Asia Pacific Equity: Tied to the Long-Term Growth in the Region

  • Core exposure to Asia with a high-conviction, concentrated fund of our best ideas, designed to outperform the benchmark over a full cycle
  • Emerging market bias within Asian marketplace and thus exposure to the highest growth areas in the region
  • Access to high-quality growth businesses that can deliver stable earnings growth, offering participation in rising markets and protection in falling markets
  • Style-consistent investment results through disciplined application of our bottom-up process
   

Where Are We Finding Opportunities?

Long Runway of Growth in Chinese e-Commerce Companies

The Chinese have fully embraced new technologies and e-commerce growth has been extremely strong. As brick-and-mortar retailing never really matured, e-commerce channels have leapfrogged over as the preferred shopping venue.

In the Vontobel Fund – Asia Pacific Equity, we own Alibaba, the leading e-commerce platform operator in China with a dominant market share, and Tencent, a major Internet platform in China with a strong presence in on-line gaming, instant messaging, and one of the country's largest web portals. Both have generated significant revenues and profits and we think they have a long runway of growth ahead.

China e-commerce Gross Merchandise Volume vs. e-commerce % of Retail Sales

2018-08-13_mp_asia-pacific_chart3
 

Source: Tmall Presentation, Barclays

Indian Financials are Poised to Perform

We think India’s middle class will continue to develop steadily and it will be sizeable. In fact, India is creating nearly 1 million total jobs per month (informal and formal combined). This will make it a strong market for companies able to provide the goods and services demanded by increasingly wealthy consumers, including financial services, such banks.

In the Vontobel Fund – Asia Pacific Equity, we’ve owned HDFC Bank, the largest private bank in India, for years. We’re talking about old fashioned retail banking where profits follow the roll-out of its branch network into new markets to attract savings, which are in turn lent out at high margins primarily to retail or small businesses. Structurally, India has a meaningful amount of the population that still has yet to establish a bank account. Thus, the potential exists for a long runway of earnings growth.

HDFC Bank: Branch Network and EPS

2018-08-13_mp_asia-pacific_chart4
 

Source: FactSet, Bloomberg, Vontobel. Past performance is not indicative of future results.

Consumer Staples are Fertile Ground Throughout the Region

Increases in domestic consumption and rising per capita income are not only key to the long-term picture in the Asia Pacific, but also provide fertile ground for opportunities that meet our criteria for investment. We have found that people generally do not reduce their consumption of shampoo, snack foods, beer, liquor or cigarettes during times of macroeconomic change. And while outside influences such as exchange-rate movements on imported inputs can affect manufacturing costs, we look for businesses with pricing power that can pass cost increases on to end consumers – with minimal impact on volume demand.

We are finding great consumer staples companies all over the region – from Thai convenience store operator CP All, to Indian tobacco company ITC Limited, to Nestle Malaysia and Nestle Pakistan and Korean cosmetics conglomerate AmorePacific.
 

Valuations are Still Reasonable

Given the run up of Asia ex-Japan equities in 2017, correlation between markets would suggest that it was a liquidity rally. However, P/E multiples have not been stretched, with much of the growth driven by an improved earnings outlook. Despite the strong growth in the region, markets are still cheaper than much of the rest of the world with the MSCI AC Asia Pacific ex-Japan forward multiple at 13.5x versus 20.5x for the MSCI ACWI.

Vontobel’s Approach: Participation in Rising Markets and Protection in Falling Markets

As we look for predictability on a long-term time horizon, we automatically exclude businesses that are heavily affected by such things as unpredictable trade flows or exchange-rate movements. In fact, we seek to invest in companies with consistent and durable earnings growth that can deliver upside gains but also provide downside protection during times of market volatility. While there are geopolitical risks in the region, we believe our Fund has held up well on a relative basis, reflecting the nature of our underlying investment philosophy.

Vontobel Fund — Far East Equity Performance (%) as of end of July 2018 (I-share class)

2018-08-13_mp_asia-pacific_chart5
 
FUND CHARACTERISTICS
Share Class Vontobel Fund – Asia Pacific Equity I
Reference Index MSCI Asia Pacific (Ex-Japan) Index TRN
Currency USD
Inception Date 04.04.2007
ROLLING 12-MONTH NET RETURNS (%)
Period Vontobel Fund – Far East Equity I MSCI Asia Pacific (Ex-Japan) Index TRN
31.07.2017 - 31.07.2018 6.92 5.31
31.07.2016 - 31.07.2017 16.30 24.47
31.07.2015 - 31.07.2016 -0.41 -0.25
31.07.2014 - 31.07.2015 1.78 -8.93
31.07.2013 - 31.07.2014 14.50 19.20

Past performance is no guide to future performance. Performance data does not take account of commission or costs charged when units are issued or redeemed. The return of the fund may go down as well as up due to changes in rates of exchange between currencies.
Source: Vontobel Asset Management.

As of March 7, 2016, Mr. Brian Bandsma took over the management of the Vontobel Fund – Asia Pacific Equity. There are no changes to the fund as a result of the management change.