Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Eric Moffett, Manager of the T. Rowe Price Asian Opportunities Fund.
Hi, Eric.
Eric Moffett: Good morning.
Wall: So, last week in Asia we had a bit of a blip in terms of markets because Donald Trump announced plans to finally, as he threatened in his campaign trail, be more protectionist when it comes to China. What happened to markets?
Moffett: Well, markets are vulnerable to any shock or any worry right now. Valuations for MSCI World are up to 21 times trailing earnings. So, when the markets are a little bit expensive, bad news is not received well. I think in the case of all this Trump talk, trade talk from Mr. Trump that is, I think the key thing is the market is confusing the possibility of a trade war with the probability of a trade war. Both sides have announced possible plan tariffs. But both sides also have given themselves time to talk and they are talking feverishly right now, because neither side wants a trade war. Both have a lot to lose. And so, I think, a lot of this is political fear and negotiation in public. This is a guy working out of the deal and he is just trying to come up with a better deal.
Wall: And of course, the point that you make there that markets are just very sensitive at the moment. So, any kind of adverse threat or news, be it inflation, be it trade policy, is always going to have a negative impact on markets?
Moffett: Correct. I think out here in Asia markets are particularly sensitive to the news and folks get very excited, both in positive and negative ways, when the news turns – yesterday was a very good day in the market, tomorrow might be a bad day. It's very difficult to predict the short term.
Wall: Now, our readers and indeed, your investors are long-term investors. They are not speculators; they are retail investors. What should they do in situations like this? Is it perhaps a buying opportunity when we see markets slump like it did last week?
Moffett: It certainly can be. And I would say in general when markets are volatile, the best thing to do is nothing. The media and a lot of the folks writing about the markets focus on the short term and frankly, some of the markets want you to do something. But oftentimes, selling when the news is bad is a bad idea. Likewise, buying when everybody is happy and optimistic is also a bad idea. So, the best thing, I think, to do for a lot of investors is just to sit tight and wait out the volatility.
Wall: Now, your remit is not just China. It's Asia opportunities. Where are you seeing the best opportunities across that set?
Moffett: It's a very diverse set. So, my hunting ground is everywhere from Korea in the north, down to Indonesia in the south, out to India in the west. So, it's a really big hunting ground. And I see opportunities across the region. Frankly though, China is the area where I'm seeing some of the most interesting opportunities, particularly in China's A share stock market. Now, the A share market has a really bad name because there are parts of the markets where you have stocks with no earnings trading on like 70 times sales. They have got some story people are excited about. And of course, that's not where we hunt.
When you look at the really big blue-chip stuff though, the stuff that some people might consider boring, there are some really, really good companies that are only just now being discovered by foreign investors. Some of these stories bore local investors to tears because they are only going to grow 15% a year, let's say, and a lot of local investors want to get rich quick. But we think by looking at those companies we can find some great long-term opportunities. I've really been impressed with the quality of companies there.
Wall: And I think sometimes investors are put off by the story in China, partly because it's so opaque, partly because they hear concerns about debt or indeed state-owned enterprises. As a professional investor, how do you sort through all that fog in order to find the opportunities?
Moffett: A lot of times it's just as simple as looking at the numbers. So, the debt is a good example. I think the common narrative when you read a lot of the western journalism is, 10 years ago China's nonfinancial corporate debt to GDP was 100%; today we're at 160%. And then the next paragraph will basically say, and therefore, this place is going to blow up at any minute. But the one very simple fact none of these writers note is what's happened to interest rates in China. So, 10 years ago, the one-year benchmark rate was nearly 8%; now, it's about 4%. So, the cost of borrowing has come down and much as is the case in the west, the falling interest rates have enabled a build-up of debt. Now, it's always better to have less debt than more. But the fact interest rates have fallen meant that corporate interest to GDP, which is the key systemic thing to watch, is actually the same percentage, 7% today that it was 10 years ago. And so, the low rates is part of the story if it doesn't get as much air time.
Wall: And finally, we are only one year into the Trump presidency. He is not going away anytime soon. Over the next three years, should investors in Asia be concerned about any of his policies? Or is it the case of just ignoring the man in the White House?
Moffett: Well, you can't ignore the man in the White House. And I think his administration presents one of the biggest unknowables about the region, both in terms of foreign policy and trade and economics. We are in the midst of, of course, a big focus on that and it's difficult to know exactly where things will go. So, you definitely, definitely, can't ignore him. But I do think that US and China's economies are now so intertwined, both sides have so much to lose that a brokered solution is possible, negotiated solution when both sides are happy is definitely possible.
These crises and worries, they will change from month-to-month, quarter-to-quarter. Six to nine months ago, everybody was asking me if the war was imminent on the Korean Peninsula. Now, they are going to the Winter Olympics. Trump is going to meet with Kim Jong Un. I mean, gosh, who would have thought. So, today, everybody is worried about trade, but maybe everything gets resolved.
But we do have three more years of the administration. I think trade is the one consistency in President Trump's policy and thinking for a good 30 years. And importantly, as well, in Washington DC where we have a government where nobody seems to agree, the two sides are very far apart, trade with China is one area actually where we have bipartisan support. So, the Democrats and Republicans both agree that taking a tougher stance on China trade makes a lot of sense. And so, just the fact that this is one of the only things they can agree on, makes it potentially a more powerful issue. So, it definitely bears watching, but I don't think it's time to panic.
Wall: Eric, thank you very much.
Moffett: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
