The following is an edited transcript of the interview
What is the outlook for Asia?
It's pretty challenging. The region is definitely experiencing a slowdown, if not, china already being in a recession. You can look at the headline statistics and see what they say, but I think on the ground, it's a lot worse than what is portrayed numerically. So the outlook from here in my mind is one of caution.
Valuations for the region, are at best, fair, and marry that with the prospect of margin compression and earnings downside risk, because we're just now starting to see the full effect of the inflationary impetus of commodities that came through in the first half of the calendar year. From right now's reporting season, you're getting snippets of how companies are dealing with it and what magnitude they're seeing. But I think we have not seen the full force of that come through the P&L of a lot of companies. So I reiterate that the outlook for Asia is one of caution.
What are some interesting trends in Asia’s technology industry?
In terms of technology within the region, one exciting part of the market that I see, and in particular, linking with some companies, is the tech hardware chain. These would be things like foundry and memory. Whether the world goes into a global recession or not, we won't derail from the interesting thematics that we're seeing along the lines of the shift to electric vehicles, cloud computing, artificial intelligence, etc. All of that is very much being pushed towards the leading edge node of logic. Also, very silicon intensive, which lends itself to memory. So from where I see it, companies like TSMC (NASDAQ: TSM) and SK Hynix (XKRX: 000660), are expected to be quite big beneficiaries of this longer-term structural trend. Albeit, shorter term, the market is a little bit more dismissive of companies that are linked to technology, particularly of their economic weakness.
What areas are you watching for investment opportunities?
I think where I see a big disconnect in the market is the energy complex. I think the market is very focused on crude oil, and crude oil producers, but in the Asia Pacific, there are a lot of other derivatives related to that, such as gas and coal. Energy is very highly correlated, but I see a big disconnect in terms of where the spot price is, where the forward curve is and where the market and the fade of these commodity prices are inbuilt in the P&L. For example, oil producers, I don't see much fade over the next three to four years in terms of forward curve versus consensus expectations. But for something like an Indonesian coal miner, there's a precipitous falling from what they are expecting for pricing this year and long-run coal pricing. Given the correlation that you have between coal prices and oil prices, someone's going to be right, and someone's going to be wrong in either of those trades. So I think one of the bigger opportunities right now is in the energy complex, but not so much on crude oil. As I mentioned, gas, coal, and to a certain degree, also VLCC (very large crude carriers) shipping companies.
What should investors investing in Asia be aware of over the next year?
It's a little bit of a short timeframe, but my number one concern at a high level would be global financial conditions in the sense that Western central bankers have lost a lot of credibility, where inflation has skipped away, and they want to try and regain that. They're tightening at a rate of knots, and my greatest fear is that they go overboard and aggregate demand conditions just contract very rapidly. The dollar remains strong because of rising rates, and that will put the squeeze on growth in emerging markets, of which Asia, excluding Japan, is one component of that.
What are some tips for investors planning to invest in Asia?
What I've noticed in my career coming out of a developed market, Australia, going into Asia is that the sentiment swings can be much more severe in the Asian region, and don't get carried away with the emotion, both on the upside and the downside. The other tip is that there still are areas of inefficiency within Asia, particularly with respect to valuations. For example, in Asia, there's an overreliance on simplistic valuation metrics, such as PE. I encourage you to try and push yourself to think, "What other valuation metrics could I use?" and get an edge over the market that way.