Magazine issues » Summer 2013

INTERVIEW: In the chaos, there is opportunity

Hugh-YoungHugh Young at Aberdeen Asset Management Asia would like to increase the group’s qualified foreign institutional investor quota and launch an A-shares fund. Stefanie Eschenbacher finds out about his plans for China and beyond.

Hugh Young, managing director at Aberdeen Asset Management Asia, envisages an increase of the group’s qualified foreign institutional investor (QFII) quota and a dedicated A-shares fund.

Young and his team have substantial amounts invested in China, India and Japan, but he says there are other countries in Asia that have caught his imagination.

“There is the vast in-between bit in the Asia Pacific region,” he says, adding that it is home to some great companies. He says there is potential in places such as Vietnam, Indonesia and Myanmar.

In fact, Young recently invested in Myanmar via a Singapore-listed property development company, Yoma.

Still, he would like to see the range of products investing in China increase, even though he says A-shares listed in Shanghai and Shenzhen are generally of poor quality.

Young says his team would do a good job managing an A-shares fund for those investors who are interested.

This product could be a closed-end fund, which means he would not have to deal with large inflows of money when investors are bullish on China, or be forced to sell assets to meet redemptions when sentiment turns the other way.

Aberdeen Asset Management Asia has a QFII quota of $200 million, despite having initially applied for $800 million.

The bulk of the QFII quota – more than 70% – is used up for fixed income investments. He holds largely government bonds, but also corporate bonds.

For the equity proportion of his China investments, Young prefers to buy companies listed in Hong Kong.

In Young’s top ten holdings of the Chinese Equity Fund, there is not a single A-share or B-share.

“China does not have that many great companies,” he says. “The bulk of them are in the hands of government and not necessarily run in the interest of shareholders.”

Young says China is the country where he and his team put in the most work for the least reward.

“China is a salesman’s dream: a billion people, an economy that grows at 10%, with people all buying fridges and cars, and eating at McDonalds,” he says. “But the reality is very different.”

It is “easy to be seduced by the big numbers”, he says, warning that following economic growth as a driver for investments is dangerous.

Ultimately, success is down to proper management of a company, its ability to grow profits, and sharing them with investors. Although, Young adds, this argument “is probably not as exciting as millions of Chinese climbing out of poverty” when it comes to sales.

Investing through QFII is challenging in general, but there are also uncertainties about the capital gains tax China charges foreign investors.

TAX CHALLENGE
While the tax rate is officially stated at 10%, Young says it is not entirely clear whether it has to be paid, although he has done so in the past.

Tax is also one of the things he worries about when it comes to India.

In recent months, India has become more vocal about revising the double taxation avoidance act with Mauritius.

If this happens, Young says, the implications for asset managers, which typically invest in India via Mauritius, will be huge.

“Some companies could go via Singapore,” he says. “If India goes after Mauritius, why would it not go after Singapore as well?”

Young argues that if countries such as India impose a significant tax on capital gains, investors will think twice about investing. They might accept a tax on equities that are performing well, but in India equity performance has been mixed.

He also invests in fixed income, saying it is one of the few higher yielding markets. “The fixed income outlook is a bit shaky given the current government policy,” he says. “India is the most disappointing place from a top-down point of view; so much potential, but so much disappointment.”

Young recalls his first visit to Pudong in Shanghai, which today is a Special Economic Zone, some years ago when he sat “in one of the rare cars on China’s road”. China generally sets out what it wants to do and achieves it, he says.

“Whereas India remains very Indian: it is a great place for old-fashioned romantics, but frustrating for a business man.”

Young says while every investment decision is made based on a range of criteria, there are some world-class companies to be found in new sectors such as IT and pharmaceuticals.

In general, he says he favours some of the companies operating in new industries that “started on a clean sheet” and were set up by young, well-educated professionals.

“Some pharmaceutical and IT companies have done phenomenally well, although there have also been disappointments,” he says.

Young says after years of subsidies for India’s new industries and growth rates of between 25% and 30%, some companies are going through “growth pains”.

This comes at a time when the global economy is slowing down, reducing demand for India’s goods and, perhaps more importantly, services.

“Because a sector is slowing down, it does not necessarily mean it will disappear,” he says. “We are long-term investors – ten years or more – and in a tough year a company can really demonstrate if it will be able to survive.”

Young also says that the cultural aspects of running a listed company do not occur overnight.

CORRUPTION
Corruption on a political level is large in China, he says, and a lot of money “goes missing”. The same can be said for India, he adds, but unlike in China little gets done in India.

There are other trends in emerging Asia that can have an adverse effect on economic growth, such as inequality.

“Income inequality creates instability and that could adversely affect economic growth,” he says. “This is true for many countries.”

While Young is positive about emerging Asia, he is less so about Japan, which has seen many false dawns.

“A lot of companies are not efficiently managed, in particular in the small cap space, but this can be an opportunity,” he says. “Until recently it has been a disappointing stock market.”

Macroeconomic policies, such as devaluing the yen, are not addressing the real issues of Japan, Young says. “I am not sure it as simple as that,” he says of Japan’s current monetary policy.

“Devaluing the currency might make the products marginally more competitive, but the question is how much more attractive?”

Devaluing the yen might make the labour component cheaper, but for major exporters such as Toyota, the labour component is small.

While it makes existing stock cheaper, imports of iron ore and other metals are becoming more expensive in yen terms.

Being a long-term investor, however, is about being able to survive even in challenging times.

©2013 funds global asia

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