Finding value in a slow growth world Arnout van Rijn, CIO Asia Pacific 6 November 2015 For professional investors only 1
Central bankers game: They have played all their trump cards Quadruple Quantitative Easing Interest rates are close to zero everywhere. What more to expect? > Financial markets have mostly responded positively > Problem is: the real economy hardly responds > Only China can ease further, but will it have an impact? 2
Finding value: Economy is clearly not helping Source: CLSA 3
Finding value: Value style is out of favor > Weak growth has been good for growth stocks with high multiples > Quality and low risk also in favor > Investors want equity returns but not equity risk > In Robeco quant model the revisions factor has been strong while the value factor has been weak over the past few years Value factor performed poorly in GEM since 2012 Winning styles in Asia ex Japan (2015 ytd) Aftermath financial crisis Asia crisis Source: Robeco, Datastream BoA Merrill Lynch Note: The chart shows how the 33% cheapest stocks as per P/BV and P/E within our MSCI EM universe (most liquid 800 stocks) performed over time versus the 33% most expensive stocks. Hereby we assume a holding period of 12 months and the results are normalized for country bias. 4
Finding value: Value factor has a strong track record Longer term we still feel passionately about our preference for the value style Source: MSCI 5
Regional market performance: Japan leads, strong dollar is felt Country YTD Local YTD USD 2014 USD Japan 10.5 9.4-3.7 China A 7.0 4.7 46.8 Hong Kong 3.7 3.8 5.1 Philippines 3.1-0.7 26.4 India 2.1-0.7 23.9 China -0.8-0.7 8.3 South Korea 1.4-0.9-10.7 Vietnam 3.4-0.9 5.6 Taiwan -2.9-5.1 10.1 Pakistan -3.8-7.4 13.7 New Zealand 6.4-8.0 8.2 Australia 2.1-9.9-3.2 Singapore -6.6-11.3 3.1 Thailand -4.4-11.7 16.8 Indonesia -9.0-17.4 27.2 Malaysia -1.2-18.2-10.7 Sri Lanka -13.4-19.3 19.1 Source: MSCI as of 23 October, 2015 28% YTD 6
Currencies: Sentiment shift on the yuan but value is still there > US Treasury May 2012: Significantly undervalued > October 2015: Below its appropriate medium-term valuation (based on current account surplus and net inflows of foreign direct investment) > Many Chinese companies have paid back US dollar loans Currency PPP Spot Over valuation Under valuation Singapore dollar 1.67 1.40 19% Australian dollar 0.71 0.71 0% Japanese yen 113 120 6% HK dollar 6.74 7.75 13% Korean won 980 1133 14% Chinese yuan 5.11 6.36 20% Taiwan dollar 24.4 32.4 25% Philippine peso 27.9 46.8 40% Indonesian rupiah 7670 13600 44% Thai baht 19.3 35.5 46% Indian rupee 34.6 65.1 47% Malayan ringgit 2.22 4.28 48% Source: CLSA, Bloomberg Oct 28, 2015 7
Regional valuation: Why not Asia? > Asian markets trade at a 20-30% discount to global averages with better earnings growth > Korea and Taiwan look most attractive on cash flow valuation multiple > Japan and Korea have best earnings growth outlook > Australia and Taiwan have best yield support > Depressed valuation over China risk offer good investment opportunity Country valuations Asia-Pacific Japan Australia China Taiwan Korea Thailand India Indonesia AsiaPac Asia x Jp USA World P/CF 2015 8.7 10.0 8.2 7.6 5.5 8.4 13.9 10.9 8.5 8.2 12.4 10.8 P/B 2015 1.3 1.8 1.3 1.6 1.0 1.9 3.2 2.7 1.4 1.4 2.8 2.0 Div. Yld 2015 1.9 5.0 3.0 3.9 1.6 3.1 1.5 2.5 2.7 2.8 2.1 2.6 P/E 2015 14.9 15.8 10.1 12.6 10.9 14.5 19.7 15.6 13.7 12.5 18.2 16.4 E growth 15e 19% -8% 3% 5% 16% 7% 10% -4% 8% 4% 0% 1% P/S 2015e 0.8 1.9 1.2 0.9 0.6 1.2 2.1 2.5 1.0 1.1 1.8 1.5 Source: MSCI, IBES estimates, Oct 26, 2015 8
Asia: Earnings revisions not so bad considering macro weakness Consensus EPS growth 2015 Indexed to 100 in Jan 2014 Region EPS growth now EPS growth then Japan 19% 10% US 0% 11% APAC (ex Jp) 2% 11% China 3% 12% Europe 0% 12% Em Mkts -1% 10% 9
Asia: Miserable flows EM Asian fund flows, back to 2006 > First it was Russia, then came Brazil, but it was China that broke the emerging markets investors back > Massive outflows from the Global Emerging Markets (GEM) Asset Class > After strong inflows in 2009 and 2010 GEM Funds saw $90 bln of outflow since 2013 about 7% of AuM > Japan continued to see inflows, until the China scare in August GEM fund flows, down 30% from peak in 2013 Country Domestic flows Foreign flows EM/Asian funds 0 - Japan + + China + - India + + South Korea 0 - Taiwan - - Australia + 0 10
Asia: Miserable flows a contrarian indicator > Fund flows have always been an important driver for Asian equity markets > These are largely trend-following and the trend has been negative for most Asian countries since 2013 and accelerated down in 2015 > We take the contrarian angle and consider this a positive for the Asian equity outlook in 2016 especially since current positions are negative to the extreme 11
Corporate governance: Gathering momentum > Asian governance culture has little cares for minorities > Dramatic change has taken place in Japan due to new Governance Code and Stewardship Code > Expect better shareholder returns will tighten discount with global markets Source: Morgan Stanley 12
Asian markets: Back in the range, Japan bull market correction Source: Bloomberg 13
Japan: Positive outlook, earnings will drive the market, not the economy Positives > Earnings outlook still being upgraded. Some pricing power returns to Japan (left chart). Negatives > Economy only marginally better. Export markets remain weak. > Not only the Government Pension Fund, other institutions are buying too (right chart). > Buybacks are picking up, payouts on the rise, companies herding behavior will help. > Focus on ROE is now talk of the town. Implementation of Governance Code takes place. Earnings revisions remain strong Local institutions are now buying in earnest Source: CLSA 14
Japan: The Home of Value Percentage of companies trading below book 15
Korea: Positive outlook, focus on payout Positives > Korea the cheapest market in the region: now trading at book value and 6x cash flow. Negatives > Corporate governance unbecomingly weak for a (nearly) developed market (right chart). > Korea discount to tighten as National Pension Services focuses on payout ratio. > Korean won no longer a threat to competitiveness, now even depreciating versus yen (left chart). > Earnings outlook quite healthy. JPY exchange rate in KRW Payout ratios Source: Bloomberg Source: MSCI 16
Taiwan: Neutral outlook, identity crisis Positives > Companies have taken margin hits for a decade. First signs of improvement coming through. > Well run companies, management works for you (dividend). > Valuations compelling: 7.5x cash flow and 4% dividend yield. On PE Taiwan trades 2 standard deviations cheap (left chart). > Relations with China improving slowly, low embedded market expectations. Negatives > Lack of interest from traditionally active local investors while rates stay low (right chart) > Tech demand has weakened sharply over past 4 months Valuation 17
Australia: Cautious outlook, hogs cycle works both ways Positives > Strong corporate governance culture > The market will find support given the high dividend yield. > Weak AUD provides some relief > Steady inflow from superannuation funds Building approvals at record levels, should impact Negatives > The downturn in the commodity cycle is in its third year and turnaround is unlikely (below right). > Unemployment is moving up. > Housing has been supporting the economy but housing prices are extremely elevated. Supply response is coming (below left) > Earnings outlook remains muted, and valuations are unattractive Resources investment as % of GDP, further to fall Source: BoA ML Source: Bloomberg 18
Asian equity markets outlook: Upside capped due to weak economic growth > Japan is a bull market, rerating can continue > Other markets have corrected on exaggerated fears over China leading to money outflows > Most are now in the middle of a trading range > We stay bullish on China; supportive monetary environment, reforms happen > Many currencies offer very good value and can help returns > Governance and shareholder returns are big issues being addressed in Asian boardrooms > Valuation discounts versus Western markets will eventually tighten > 2016 will see region trade higher but upside is capped until China and/or global growth reaccelerates > Valuation and weak sentiment support our optimistic outlook Summary Macro 0 Further interest rate cuts help but global weakness a negative Earnings 0 Climbing up from the bottom in most of Asia Valuation + Korea cheap, India and Indonesia high expectations Technical analysis 0 Some bull markets, some weaklings Regional index in trading range Sentiment / supply and demand + Sentiment excessively weak. Contrarian buy signal 19
Market outlook: Country ranking Country ranking Positive Japan Korea China Improvements in governance; much more focus on shareholder returns. Domestic investors are back. Still good value. Good earnings growth at low valuations. Governance and low-payout are being, albeit slowly. Bull market no more, but can turn quickly. Supported by reforms and rate cuts. Neutral India Taiwan Singapore India s structural story intact but temporary reset of expectations. We look to buy on dips. Tech stocks are cheap on cash flow. Yield supports market. Absence of domestic investors leaves upside. Benefits from global yield quest and good governance. Limited bottom-up opportunities. Cautious Thailand Malaysia Indonesia Australia Hong Kong Growth slowdown ignored. Corporate leverage has gone up and earnings estimates coming down. Under pressure from lower oil price. Limited options for value investors. Economy quite weak. Pressure on earnings. Currency may fall further. Valuations excessive. Macro remains weak, housing main driver. Most expensive banks in the world. Solid dividends underpin the market. Fears over US interest rates still there, fears over China spending in HK intensify. Tailwind from China rally. 20
Just say no to ETFs! They are forced to do stupid things Goldin Properties (283 HK) 2. Stock drops on May 20 and 21, 2015 over Hanergy TFP Solar connection. 4. Once included the stock collapses again leaving ETF investors holding the bag 1. Inexplicable share price rise since March and very concentrated ownership suggests stock price manipulation. 3. Company gets added to MSCI China Index on May 29, 2015 based on high market cap and high trading volume. Index funds and ETFs drive stock back up to near old highs on heavy volume in last days of May. 21
Important information This document is for professional investors only. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited ( Robeco ). Robeco is regulated by the Securities and Futures Commission in Hong Kong. This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing. This document is intended to provide the reader with information on Robeco s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance. 22