Stockbyte
Asia is a dynamic market for investors that can offer tremendous opportunities given its staggering growth. It's also a place where risks are high - especially with the latest indications of slowing growth in China. So what should investors do now - and what countries and stocks have the best potential?
Paul Simons, head of portfolio management, Asia/Pacific, with Pyrford International, was here for a Q&A, which can be found below. Those on a mobile device should click here for an easy-to-read format.
Paul Simons: Hello Katherine, thanks for hosting me this afternoon, I'm looking forward to taking part.
Globe and Mail editor Katherine Scarrow: We're pleased you could join us today, Paul. We've got a number of questions already, so let's get started.
Reader Peter asks: Which country in Asia is the most preferred place to invest in?
Paul Simons: As you know the Asian region is very diverse ranging from developed markets like Australia and Japan to smaller and less developed ones like Malaysia. It's important to keep the right time horizon in mind but right now we like the dividend yields available in markets like Hong Kong and Taiwan along with the longer term growth of somewhere like Malaysia.
Reader Frank asks: For average small investor is ETF the best way to go? What are some of the more liquid Asian ETF for Canadian? Recommendations?
Paul Simons: Certainly the ETF marketplace has developed significantly in the last few years and does indeed offer a relatively easy and low cost way of getting exposure to the region. Keep in mind though that there will be significant differences in the performances of countries over time and obviously of stocks within each country so with an ETF you'd miss out on the stock picking results of those fund managers who have a long track record of finding the best opportunities. There are a number of mutual funds which can give access to the region in this way. I can't really give you a recommendation of a specific ETF but BMO in Canada have a good platform which might be a good place to start.
Reader 69buick asks: Why would anyone invest in Asia at this point in time?
Paul Simons: Because over the long term it will have one of the fastest growing economies in the world driven by populations which are generally young and expanding .individuals who have very low levels of debt and a huge appetite for the standards of living we have now in Europe and North America. In addition government finances are generally in much better condition so there is no need to be raising taxes and cutting public spending as there is elsewhere. Interestingly much of Asia's potential is in encouraging its citizens to save slightly less and spend slightly more, pretty much the opposite of the issues you and I face at home! As I mentioned earlier time horizon is key and there are always areas to avoid in the short term but the region will provide very attractive returns to long-term investors.
Reader Peter asks: Between China and India, which country offers a better opportunity for investment? As a recent suggested that India is posied to overtake China's growth rate in 2013.
Paul Simons: Peter that's a great question and one we give a lot of thought to. China has certainly generated the most media coverage in recent years, not all of it for positive reasons. In its favour China now has great infrastructure - fantastic roads, airports, telecommunications and energy supply. It also benefits from a very entrepreneurial culture and government which can make quick and powerful decisions (though not all of them right!). It's weaknesses are that it's population, whilst large, is aging rapidly - there are already labour shortages in certain areas and historically it has been hard for companies to enforce patents or copyrights in China so they have protected them by keeping them out of the country altogether. India by contrast has much weaker infrastructure and much slower decision making at government level but a younger population which is well educated and largely English-speaking. We expect both to continue to grow strongly over the long term but once India improves some of its infrastructure I think it will have a real advantage.
Reader mack asks: Is investing in Asia at this time primarily a long term investment or is it also possible to have good short term results?
Paul Simons: Mack - Plenty of people make good money from short term approaches but you have to keep in mind that many of the countries in the region are still developing their capital markets and the regulatory bodies which control particular industries. As a result there can be nasty surprises if the rules are changed at short notice. If you really want to pursue a short-term approach I would look for companies with sound business models and balance sheets whose share prices have been driven down by wider economic concerns, possibly unfairly. If those concerns disappear they may perform very strongly in the short term but really the soundest advice I can give you is to take a slightly longer term view as that should present better opportunities.
Reader J asks: How do you do your due diligence since you're so far away from Asia?
Paul Simons: J - Our research process has two parts. We look very closely at the returns a company has been able to achieve in the past and with the availability of company annual reports in electronic form we can do that from our office in London when we identify a company which we think is potentially interesting we then visit it in its home market and discuss with the senior managment of the firm what opportunities and challenges the business faces and whether they will lead to similar or very different returns in the future. We visit every company we invest in in this way and return each year to those we hold so every member of our investment team spends a long time on the road.
Reader Albert Ritchot asks: If you had two countries in Asia having the exact same economic prospects except one: one countries has a very high birth rate whereas the other does not. Which country would you prefer to invest in. Is a high birth rate an advantage for a country such as India relative to China?
Paul Simons: Albert - All else being equal a country whose labour force (generally those aged between 15 and 64) is going to grow rapidly will enjoy faster economic growth than one whose labour force is shrinking birth rate is a factor in that but not the only one. Of equal importance is the percentage of the workforce which will shortly retire and to a lesser extent immigration. Japan is a good (or bad!) example of a country whose labour force will be shrinking for many years to come and even a remarkable pick up in the birth rate would not impact that for 15 years.
Reader Simon asks: What are your thoughts on real estate in Asia? Specifically China? Is the market saturated / overpriced?
Paul Simons: Simon - I am personally concerned about the real estate market in parts of Asia and in China in particular. In recent years low interest rates and poor returns from the stock market have encouraged many Chinese families to invest their savings into investment properties in the belief that doing so is a one-way bet. This has spurred property construction on a huge scale across many Chinese cities. The problem is that many of these sold units are not rented out because their is quite a strong feeling against anything which is not "new". I'm old-fashioned and not sure what the value of a property is if it doesn't generate an income and nobody is likely to end up living in it. Undoubtedly there are millions of people in China who would one day like to own their own property but many of them are currently priced out of the market. It's certainly a cause of great concern for the Chinese government and they have previously taken steps to try and solve the problem, not all of which are successful, or even predictable.
Reader nancy19 asks: How dependent is Asia on the economies of Europe and North America?
Paul Simons: Nancy - ah the million dollar question to finish with! The short answer is still "very" but less than it used to be. Much of the growth of Asia in recent years has come from supplying goods or services to Europe and America more cheaply than they can be produced in those markets as economies have evolved more of their growth has come from domestic consumption and as this increases the region will become more self sufficient. However, for this to happen people in countries like China need to believe that their state will provide healthcare, education and retirement and unemployment benefits because at the moment they save as much as they can to provide them for themselves. As I said earlier on, this is the reverse of what needs to happen in the "Western economies" where we need to spend a little less and save a little more!
Globe and Mail editor Katherine Scarrow: Unfortunately we're out of time. Paul, thanks again for joining us today. Any final comments before we sign off?
Paul Simons: Only to thank everyone for taking part and you for hosting the session.
The recommendations and opinions expressed herein are those of Paul Simons and do not necessarily reflect those of Pyrford International Ltd or BMO Mutual Funds and are not specifically endorsed by BMO Investments Inc. or any other entity within BMO Financial Group