In the latest addition to our alternatives range, we believe we have developed a perfect fit between style and substance.
The vast and varied Asian equity markets lend themselves perfectly to the long/short style of investing. Investing across borders, industries and different-sized companies, we have total freedom and are not penned in to any style or benchmark constraints.
This means that irrespective of where we are in the market cycle, we are able to tap into the substance: the volatile and, at times, inefficient opportunity set across the Asian universe of 2,000 companies in 14 countries, exploiting their respective currency movements against a backdrop of profound change brought about by structural reform and economic transition.
With such a rich and diverse opportunity set, we are confident that our well-honed investment process will unearth many prospects on the short side as well as in our long-only book, giving us even more scope to express our ideas than we have in our traditional strategies.
As stock pickers, expressing our views as strongly as possible is what sets us apart. In a benchmark-constrained long-only fund, taking a negative view is difficult – you are limited to going underweight, or simply avoiding a stock altogether.
Since MSCI data recently suggested that only 12 of the 600+ stocks in its Asia Pacific Index had a weight of more than 1%, underweights have become even further restricted. Using synthetic shorts allows us to express more views, more comprehensively.
Two recent stock examples exemplifying the process are Hero MotoCorp, India’s market leader in two-wheel vehicles and Tingyi, the largest instant noodle and beverages producer in China.
Representing the long book, we initiated a position in Hero around March 2015. Hero not only taps into the consumption theme and the rising middle class in India, it has also benefited from a pick-up in the rural economy, with motorbikes and scooters more popular than cars. The company enjoys a dominant and broad national distribution network, boasts a strong pipeline of new models and margins have naturally picked up as a result of falling commodity prices.
Further, Hero has held up better than was expected following the 2010 termination of its joint venture arrangement with Honda. The stock has since risen more than 30%.
Tingyi is a short example, as China’s largest instant noodle and beverage producer. Its key market has always been construction and blue-collar workers. As China shifts from a manufacturing nation to one led by consumption, the company has suffered from structural decline. Coupled with this lower demand, noodle prices have risen yet this has failed to translate into positive elasticity for the company. Simultaneously, competition from other noodle manufacturers is rising.
We first invested in August 2015, having noticed the share price was declining, but in recognition the structural impact would continue, we added to the position in the short book and are continuing to make money as a result.
The discipline and rigour we have applied for years that results in thousands of company meetings every year allows us to establish whether or not value exists.
Once that initial filter has been applied we spend hours cross-examining the stock with qualitative questioning and valuation analysis.
Looking ahead, we are excited about the possibilities.
Our local presence makes a huge difference. The seemingly imminent inclusion of China A-shares in the MSCI indices takes this up a notch, moving from an important ‘nice to have’ to an absolute essential if one wants to invest with credibility. Even a partial inclusion of A-shares might add as many as 400 new companies; information on which is rarely found in English, making informed investment decisions difficult for all but the most prescient of managers.
We feel this combination of long/short investing in the Asian equity markets is optimum.
We can express our views with greater conviction, and our local knowledge allows us to act immediately at the expense of our lesser-resourced peers. Many of the smaller boutiques based in the region may be forced into herd positions, while the beauty of working for an investment group like BlackRock means we have the resources to back up our ideas – quickly, comprehensively and with conviction.
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