Featured Topic: Asia

Recent industry reports have shown that investors in Hong Kong are focusing on real estate in Southeast Asia. Demand for investment properties remains strong in the sector, with transactions climbing 19% each year to approximately $61 billion in the first half of 2017.

“Bangkok’s property prices are just about a quarter of Hong Kong’s,” explains Gordon Cheung, an investor who recently purchased a property in new project Life Asoke Rama 9 in Bangkok. “The location is also great, at the heart of Bangkok’s central business district near the Chinese embassy,” he added.

AP (Thailand) and Mitsubishi Estate Group’s development, which has 154 units for Hong Kong investors, sold more than 95% in its first two days on the market.

According to Vittakarn Chandavimol, AP’s chief condominium officer, “foreign buyers of Thai properties mostly want a stable rental income, unlike those who buy properties in Western countries for their Children’s education. Average rental yield of Bangkok’s property is 5.15 per cent. As only 49 per cent of flats can be sold to foreign buyers, the supply to each market is limited.”

Chandavimol explained the difficulties in breaking in the Chinese market. “Chinese citizens are limited to exporting $50,000 per person, per year. But buyers can split payments, not to mention the fact that a lot of flats are cheaper than that. Prices of high-floor studios on this project start at HK$670,000.”

“Despite capital controls, we expect continued Chinese interest in APAC gateway cities in the near term,” he said. “Thereafter we foresee material Chinese investment in Belt and Road markets in Southeast Asia. This should be a long-term trend.”

Financial firms across the globe are branching out into the Chinese investment market. In recent months numerous firms have launched funds in China, including BlackRock, UBS Asset Management, Vanguard and Fidelity International.

Chantal Grinderslev of Z-Ben, an investment management consulting firm based in Shanghai, said: “”You can no longer ignore China. You have to plan on being there.”

According to data from Z-Ben, assets under management at Chinese private funds increased 54.6% last year, reaching $398 billion. Between 2005 and 2015, institutional assets in China climbed 500%, starting at $1.1 trillion and hitting $7.1 by the end of 2015.

UBS Asset Management received a license to manage private funds in China this past summer. The firm’s managing director and head of China strategy and business development Aries Tung explain in an email: “China is a key growth market for UBS Asset Management. Our goal is to be a leading asset manager in China for both onshore and offshore investors. The license allows UBS Asset Management to start managing money for mainland institutional and high-net-worth investors in the world’s second-largest economy for the first time.”

In July, the Boston Consulting Group predicted that China will become a leading source of “significant” gain over the next few years. Their report states: “The Chinese market and its investors are becoming more sophisticated. An aging population and the growth of wealth are expanding demand for dedicated products, including target-dated funds and ETFs.”

According to EisnerAmper’s Timothy Speiss, “China could very well be number two or number three in hedge funds and private equity within the next two to three years.”

Sony is finalizing talks to acquire Believe Digital, a music distribution and label services provider based in France. With business operations in over 25 countries, Believe was founded in 2005 and owns TuneCore, the American company that provides indie music to significant online distributors, including Apple. The company has annual sales of around $250 million, and focuses on indie music and works with 150,000 international artists. The upcoming transaction is estimated at between $355 million and $444 million, and will include a majority stake and an information technology investment fund.

 

In recent years, Sony Music Entertainment has acquired several major players in the music industry.

 

According to Nikkei Asian Review, “The Japanese conglomerate made the world’s largest music publisher, Sony/ATV Music Publishing, a wholly owned subsidiary last year by purchasing the remaining 50% interest for $750 million. In 2015, it turned indie-music distributor Orchard Media into a wholly owned subsidiary.

 

It continues, “Sony’s music segment generated a 75.8 billion yen operating profit in fiscal 2016, accounting for 26% of overall group profit. The company is sharpening focus on steadily earning profits from a stable customer base, and the broader music content and distribution operations are seen contributing a significant chunk of earnings going forward.”

 

Bitcoin has been proven over the last few months to be a high performing financial asset and is thus gaining increasing popularity as an option for investors in Asia. Indeed, in less than one quarter Bitcoin value has doubled. Likewise altcoin is doing well.   In a recent Financial Times article Richard Walters wrote that “alt-coins are the simplest of tech companies.” All they do is release a very small piece of code. The idea is for them to develop “cryptographically secure ways to enable transactions between parties that have no other contact or way of authenticating each other online.”

In other words, there is movement toward the entire industry of cryptocurrencies which is proving time and again to be a trusted financially-performing asset with an oft-better opportunity than conventional investment options. Evidently in Asia, investors are putting money into these opportunities. This is especially true in Korea and Japan, with financiers choosing these investment markets over others. Over in Malaysia too, investors are dipping their ink in the same pot with Luno’s (a Bitcoin startup) connection with the Bank Negara Malaysia. Indeed, according to Luno Countries Associate, Mriganka Pattnaik, the bank has been successful in really starting to learn more about the Bitcoin industry and scan prevention. He added that:

“With regards to policy, (regulating bitcoin is) not a very easy thing to do. I can’t comment on when or how BNM will regulate the industry, but they are always in touch with us about this and we are more than happy to provide them with input.”

Meanwhile, Ripple – a Blockchain startup that crated a digital payments network for RTF transactions – owns a staggering 61 percent (worth approximately $16 bn) of Ripple XRP (the fastest and most scaleable digital asset). Just last month the company signed up 10 new financial institutions, illustrating it is here to stay in the cryptocurrency Asian market.

Asia has been reaping the fiscal benefits of its exports in various industries (including clothing and gadgets) for many years.  Orient Craft Ltd. is one such factory that employs 400 workers, manufacturing ladies clothing that is sent to Ann Taylor, Gap and J. Crew among others.

Located just outside of New Delhi,  Orient Craft is one of 26 such facilities in India.  Assembled they export around 250,000 items of clothing EACH day.  Over 60 percent of these go to America.  Annual revenues today stand at over $300 million.

Clearly there are indications that there is just huge demand from the west for everything Asian.  But the question is, will this last?

Politically, things in the west are changing and concerns are coming up that this could negatively impact the demand for Asian exports.  First, Trump promised to bolster US jobs by scaling back on imports. Those most impacted by this would be in Asia, specifically in China, Japan, South Korea and Vietnam – regions that have the largest bilateral trade surpluses.

As such, founder of Orient Craft Sudhir Dhingra is concerned.  He noted that: “The US under Trump could impose some additional duties, that’s a worry.  People will find out that you can’t move everything back home. People won’t pay those prices.”  And on a more global level for Asia, exports are exceedingly important.  Being the world’s fastest growing economy (around 30 percent of international growth) Asia relies heavily on trade. Indeed, when looking at the UK, one such problem could arise for Japanese auto manufacturers manufacturing cars in the U.K. and selling them to the British who want to avoid tariffs on these if exported into the EU.

Right now, things are good for Asia and its export economy.  But it is advisable for the region to start looking at how to shake things up as things evolve.

In this video, co-CIO of Mirae Asset Global Investments (Hong Kong), Rahul Chadha, talks about Asia as an attractive location for equities given the current protectionist climate, the benefits of investing in a specific company rather than the firm’s entire industry, multi-year portfolio themes, as well as China’s role in the Fourth Industrial Revolution.

Thanks to Real Estate Investment Trusts  ETF and Straits Trading, investors will be able to track REITS outside of Australia, Japan and New Zealand.  Therefore, investors will be able to get greater exposure to these REITS in Asia.  In addition, they’ll have another option on the Singapore Exchange.

This particular ETF is benchmarked to the FTSE Russell Epra/Nareit Asia ex-Japan Net Total Return REIT Index; which forms part the benchmark which is used for ETFs.  It has approximately US$10 billion (S$14 billion) in funds tracking it. The underlying portfolio of the ETF, according to Phillip Yeo, head of International Product at Nikko AM, is to deliver a gross yield of approximately 6 percent.  this is based on Bloomberg’s forward yield weighted average calculation for the 23 REITs. He further believes that the fund should be able to “deliver at least a 5 per cent yield fairly regularly, in line with Epra/Nareit Index’s historical range of 5 to 6 per cent.”

Meanwhile the status of REITs in Singapore is changing from when they used to be incredibly popular due to their reputation for high yields, property and steady income.  Now though, trust holders are not faring as well since the industry does not look all that good.  Even though indicated dividend yields remain untouched as return on assets dip.  Still, if the REITs can pay out the large dividends that the investors are hoping for, this is only because of leverage.

Ultimately though, Christopher Langner concluded: “The outcome may not be so bad, simply because there are stronger REITs and potential buyers of those very assets, in spite of their dwindling returns. It’s almost a rule of thumb among Singapore bankers that once a REIT’s shares trade below 70 percent of net asset value, it’s just a matter of time before a buyer comes in.”  It is that which investors have to hang on to.

Foreign investors who are seeking a strong investment region should look into Asian investment trusts according to some experts.  As the economies there mature, and the youth is indicating signs of good long-term prospects, the area is ripe for investments.

Despite the fact that in early 2016 Asian markets did it tough, things picked up during the rest of the year and the region encountered economic growth as well as company profits, both of which bolstered confidence in the Asian economy.   For people in the UK this fact has been particularly welcome. The Asia investment trusts delivered great returns, along with other overseas trusts, since when they converted back into pounds stirling, the returns are increased as the pound drops. As Head of Global Small Cap and Asia, Matthew Dobbs explained:

“Sterling returns have obviously been flattered by the weakness of the pound following the Brexit vote, but regional markets have made some progress thanks to the stabilisation of the Chinese economy, accommodative monetary conditions and modest expansion in economic activity. For 2017, we remain concerned that near-term stabilisation in Chinese economic conditions has been at the price of delayed economic restructuring and ultimately unsustainable credit growth. On a more positive note, global recovery would be helpful for the region, although subject to no material increase in trade barriers. With new leadership in Taiwan, the Philippines and, potentially, Korea, political developments will remain a focus.”

Furthermore, according to the Asian Development Bank’s recent report Asia’s $527 billion made it the top FDI destination in 2015.  And of the $1.76 trillion international FDI, almost a third went into Asia. The increase in Asia from 2014 was 9 percent.

Who is investing in Asia these days and why?  We look at a slew of investment opportunities in Asia and see which particular region is gaining popularity and what commodity.

First up, the largest (by revenue) airline in Japan, ANA, is looking into making more investments in other parts of Asia.  This is because it is trying to decrease its reliance on a slow-growing domestic market.

Numbers in Asia are looking good.  This year, the MSCI Asia ex-Japan Index returned a stable 5.3 percent. The JP Morgan Asia Credit Index measured Asian bonds at increasing 5.8 percent over the same time frame. In general, it seems that Asia is currently an attractive host for investments.  According to Chairman of the Singapore Economic Development Board, Beh Swan Gin, despite international uncertainties, Asia has kept up its perception of being a bright spark, thus attracting investment from all around the world.

Meanwhile, Singapore-based GIC has committed to investing $260.7 million in PT Nusantara Sejahtera Raya, a firm that runs the largest cinema chain in Indonesia.  this is indicative of the firm’s confidence in the long-term growth potential in the region.

 

jobsFor those considering making an investment in Asia, there are many different options.  According to Nitin Bajaj, portfolio manager of the Fidelity Asian Values Investment Trust, “There are over 17,000 investible companies across Asia – which is a lot of companies to research.”  Therefore, when it comes to making an investment choice, he says that “what matters to me for generating long term returns is to buy good businesses, run by capable and trustworthy managers at reasonable prices, when they may have short term cyclical or internal issues.” He adds that he “often look[s] for companies which will be able to thrive in what today may seem like very unfashionable sectors. For instance, child care centres or manufacturing of plastic toys or producing packaging tubes for toothpastes may not seem particularly appealing. But it is in sectors like these that I have found companies that have built deep competitive advantages, are run by able managements, generate a lot of cash and are available at attractive prices.”

Then there is the perspective of potential Asian FDI investors worrying too much about the climate there.  According to UBS Wealth Management’s Asia-Pacific investment office’s leader Min Lan Tan, “Asian credits are showing few signs of stress, with spreads at 320 basis points versus the height of over 800 basis points during 2008 and 2009.”  Nonetheless, right now Asian equity markets are pretty much stagnant and valuations are getting to crisis levels.  It is probable that earnings forecasts will lessen, but even with this, there is prosperity in the mid-single digits along with robust ROE (Return on Equity) ratios.  In addition, it is likely that quality income stocks will encounter an improved performance this year, within an environment of a reduced pace of Fed rate hikes and renewed regional central bank focus on policy easing.

If Sir Richard Branson is to be heeded, then the current environment is ripe for investing in Asia.  His Virgin Active gym chain is putting £150m ($217.85m) into South East Asia, with the opening of around 30 gyms in the region.  Virgin Active’s CEO, Matthew Bucknall, explained:

“The success of our first four clubs in Thailand and Singapore has exceeded our expectations and the time is right to accelerate our expansion plans. The global health and fitness industry is evolving rapidly, with many of the current Asia health club offerings being outdated first-generation, fitness-only formats. Along with opening more of our large premium clubs, we are also looking at new formats.”

As well as this move being beneficial to Virgin, South East Asia’s economy will encounter a hike as with Virgin’s expansions around 2,000 jobs will be created within the next six years.