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 John Lo, Head of equities for Fidelity Investments Singapore.
Hello John.
John Lo: Good morning.
Wall: So, we're here today to talk about Australia. It's a region that a lot of people I think have written off because it is so dependent on commodities for GDP growth. But interestingly, there are still seemingly stock options to be excited about because it makes more than 50% of your portfolio Australasia, doesn't it?
Lo: Yes, it does. Australia is a very interesting market. I think you're quite right to say that people have generally written it off in the last few years because supposedly to super cycle in the commodity space has died off. But actually Australia is very interesting because you've got a whole slew of companies that are competing overseas outside of Australia because the Australian market in itself is quite small.
So, in order for them to grow they have had to look for opportunities overseas, companies like CSL, Macquarie, QBE, all are leaders in their own spaces across the globe.
Wall: And of course, we've had some positive GDP growth as well. Last week it was revealed that the economy grew 0.9% for the third quarter and it's forecasted to grow 2.5% for the year. Unemployment is low. So, actually, it seems there is quite a lot to be excited about?
Lo: Yeah, again, it's been very interesting to observe how people have expected absolute worth that unemployment would crash because again of the commodity cycle. But as you saw in October, I think the unemployment number was at a 17-month low at just under 6%. So, I think that the transition from the commodities side of things to infrastructure and the focus has been on – the new government's focus has been on infrastructure has really successfully transitioned the economy along.
At the same time, the low unemployment rate has meant that people still feel reasonably confident of their future and so consumption remains robust as we've seen in a fairly strong housing market and particularly on the Eastern border.
Wall: You mentioned there that the companies you are looking for are those ones that are global with revenues outside of Australia. How worried are you then by the reliance on China of Australian companies because to do with that commodities and infrastructure sort of sector there has been a lot of China revenues.
Lo: Yes. Again, the anxiety people had has been the slowdown or the rebalancing, shall we say, of the Chinese economy which has led or leading to the drop-off in commodity prices. It has been reliant but a lot of these companies are competing in the U.S., the names I rationed off earlier, CSL, Macquarie, QBE, are doing business in the U.S. and the economy there is pretty strong. Look, the other aspect is that we shouldn't look at sort of the bigger macro numbers because we need to look at – when we look at companies, we look at how companies compete within the particular space that they are in. And by looking at those sorts of macro things, you might miss what's happening at the micro level within each of these different industries.
Wall: So, these companies that you are invested in, are they sort of best in business across the entire Asia Pacific region? It's not that you're taking a play on Australia or is it a sort of dual factor?
Lo: I tend to spend time on companies that are best in the industries in which they are competing, whether that's in Australasia or abroad. So, I think even for the companies that I look in China or Korea, which we can talk about, they have to be the best of breed, typically the incumbent or number one or number two in the space in which they are competing.
Wall: You mentioned there Korea. It's quite an interesting play. I've spent a couple of months in Asia Pacific and Korea hasn't come up much but it's a region you're feeling positive on?
Lo: Again, the view is predicated on the number of options that are presented to us. The market is deep and broad. You've got anything from a cosmetics company all the way to a deep cyclical which seem these days to be trading at bankruptcy levels, which – business is tough; but arguably, things are not about to go completely pear-shaped. So, there are opportunities right across the spectrum. I think people tend to write off Korea, A, for its lack of governance; B, perhaps it's also seen as a trade on China which it completely isn't.
Again, Korean companies are competing globally. If you think of Samsung, you think of Hyundai; these are names 5, 10 years ago you probably wouldn't really spend much time on, but today they are a meaningful brand and competing again globally.
Wall: I think they have sort of taken over the technology crown from Japan there a bit, haven't they? I mean 10 years ago it was the Japanese names that were really household brands. But now it's much more about those Korean names.
Lo: Absolutely. I mean, again, a decade ago buying a Samsung TV or a Hyundai car, people would say that, oh, that's sort of cheap, almost Skoda equivalent option to buy. Today it's a smart choice and I think that points to how they have advanced technologically, but also their ability to understand branding and how they've rolled that out across the globe.
Wall: John, thank you very much.
Lo: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
