Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Mike Kerley, Director of Pan Asian Equities for Henderson.
Hi Mike.
Mike Kerley: Hi.
Wall: So, we can't talk about Asia without talking about China. We can't talk about anything without talking about China at the moment. What's the risk with China and in particularly, contagion for the rest of the region?
Kerley: I think the risk with China is that maybe we got to call into question some of the reformers we've all got. So, happy about, if you like, over the last 6 to 12 months because some of the moves they've made not only to support the market and then withdraw that support, if you like. So, we've got to worry that maybe the reforms have taken a bit of a back seat, if you like, to some of the more recent trends. Obviously, the currency devaluation took people by surprise, the timing maybe and associated that with exports and thought it was a competitive devaluation which we don't think it is. We think it is part of the reform agenda but the timing again was still a little strange. But that's obviously put markets into a bit of a spin, especially currencies across the region. I suppose the biggest contagion risk here is the currencies, et cetera and the lack of confidence in China and what that could do for fund flows for the region as a whole.
Wall: One of things that has been beneficial for a number of Asian economies over the last year has been the oil price falling. A number of the smaller Asian economies are actually importers of oil and so they have seen huge benefits to the oil price falling. Will this continue to be a tailwind or when we start to see the oil price come up, I don't know when that will be, but will that sort of hold growth?
Kerley: It's a real mixed bag for the region. You've got some energy producers like Malaysia who have really been suffering from the weaker oil price. But generally, Asia as a whole should be a big beneficiary as you say. We haven't really seen the benefits in the same way as we'd hoped. We've seen it on the economic numbers but not really on the earnings numbers yet. So, we thought that we would see lower costs from lower commodities in energy translate into higher margins and higher profitability and that's being disappointing so far. So, in the same way it's been great to have lower prices hasn't really manifested itself in the way we'd like. So, I would argue that probably if oil prices revert then maybe we won't see the big negatives from that either.
Wall: Putting aside the economics then because we are serving the U.K. investor here, what is compelling about the region at the moment? I mean, why should people be taking the plunge in going for Asian equities?
Kerley: Well, I still think the growth outlook for Asia is still decent, especially compared to the rest of the world where as we know the growth environment is benign at best. So, the disappointing thing has been is that growth has continued to slow but we're hopeful because of some of these lower commodity prices that actually growth and profitability will stabilize this year and actually people will start looking at Asia for growth rather than just focusing necessarily on newer trades and defensive characteristics. On top of that valuations are cheap. The markets have adjusted. There were certainly some euphoria in some of the Chinese markets and a lot of that's now come out. So, valuations look compelling not necessarily relative to Asia's history but certainly relative to other equity markets around the world.
Wall: So, do you think we have to just accept an extra level of volatility with Asian investing though because that sort of bull run of the 90s where people assumed that all emerging markets could only go up has since been proved false?
Kerley: It's disappointing in so many ways that this time around this Asia now is not the Asia of the 90s. We don't have very high current account deficits. We don't have very high fiscal deficits and in fact, they are issues of the West not the East. So, you would expect when you get economic volatility actually this time Asia should be more insulating. It's been disappointing that actually we haven't seen that and I suspect that's partly to do with the nature of the investor base and fund flows and unconventional monetary policy and excess liquidity has pushed money into places that maybe it shouldn't be and when that unwind you get this increased volatility. So, disappointing from a fundamental aspect, but I suppose kind of understandable considering some of the moves we've had over the last few years.
Wall: Mike, thank you very much.
Kerley: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
