You have to focus on finding quality companies that have the potential to provide consistent returns explained Parbrook. But, he adds they have to be on reasonable valuations.
“Our warnings of a bubble driven by margin lending, a form of borrowing to buy shares, were vindicated when stock prices duly collapsed in the middle of the year,” he added.
According to Parbrook, Asia continues to offer significant structural advantages in terms of growth potential over the longer term, while there are short-term headwinds that need to be factored into investment decision-making. These include three key global trends: demographics, deflation and disruption.
Long-term winners could include Taiwanese and Hong Kong technology companies, while losers could prove to be the current original equipment manufacturers (OEMs) that provide autos with parts, and oil companies.
“If our predictions end up being correct, then OEMs and oil companies could turn out to be value traps – where a company’s share price appears to be cheap but is actually still expensive relative to its intrinsic value – much like Asian department stores and supermarkets that have seen their market shares -and profits- eroded by online competitors,” said Parbrook. Anticipating this disruption will be key to long-term returns as no industry in Asia will be immune to it, according to the head of Asian ex Japan Equities.
Schroders continues to remain relatively cautious on their 2016 Asian equity outlook. “Our caution stems from our view that deflationary forces and the sluggish global economy are headwinds for Asian stock markets,” said Parbrook.
“We can find quality investment opportunities in the region but it is difficult and involves ignoring large parts of the market index or “beta”. Our preferred areas for investment are companies with strong cashflows and, in this low earnings growth environment, low cost producers that also have a flexible cost base. We continue to like companies that are able to tap into the growing trend of urbanisation and the rise of the middles class,” he explained.
