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Hugh Young: I'd be buying more shares if I had the cash

Veteran Asia fund manager Hugh Young would be buying more shares after heavy falls in stock markets reeling from the coronavirus crisis, if only he had the cash.

Young, an investor in Asia’s markets for more than 30 years, believes the long-term arguments for investing in the region remain just as valid now, despite the damage the Covid-19 pandemic will do to the global economy.

But while he believes stock markets now present an opportunity for ‘the brave’, he highlighted the predicament of many fund managers as inflows into their funds dry up.

‘Although we’re sitting there saying, yes, there are lots of shares that, by definition, are more attractive today than they were three months ago, we don’t necessarily have the cash with which to buy them,’ he said.

In this video interview, part of the Citywire Virtual series, Citywire editors Audrey Raj, in Singapore, and Daniel Grote, in London, quiz the manager on prospects for Asian stocks and his team’s funds.

Young discusses:

  • how the coronavirus crash compares with previous stock market crisis;
  • why Asian markets haven’t fallen as much as other major global indices;
  • the prospects for Asia to emerge from the crisis first;
  • how his team’s funds are faring in the tough environment.

Can’t watch now? Read the transcript

Daniel Grote: Just looking at the stock market reaction to the coronavirus crisis, you’ve been in charge of Asian funds, what was Aberdeen, now Standard Life Aberdeen, for over 30 years.  So, you’ve seen a lot of stock market crises in your time. How does this one compare to what’s gone before?

Hugh Young: I’m afraid, in some senses it’s very familiar.  So, when I experienced running the same funds we have today, 1987 for example, where the crash was severe, very sharp, very severe, a day down 20%, things like that.  So, in that sense it’s not totally new territory. So, we’ve seen very sharp movements in stock markets. The Asian crisis was exceptionally painful. To be fair, the GFC or the recent financial crisis wasn’t as painful for Asia as the Asian crisis itself.  So, we’ve certainly seen such moves in markets and certainly, individual markets have experienced similar sharp moves for individual reasons. Coups in Thailand, regime change in Indonesia. So, there’s been crashes in China that we’ve seen in the past, where China closed half of its stock market.  So, these have certainly been familiar things within stock markets to see such falls. What’s difficult here is to see obviously, where it quite ends, what the effect is. There is clearly a massive real economic impact.

Audrey Raj: Given this backdrop, recession is also something that’s been highlighted. So, you think that Asia would go into a recession that is deep and short and do you think that maybe that could even change-, reshape investor psychology and how businesses are run?

HY: I think at the moment, there is every chance of recession with what’s going on because global demand has fallen so sharply, you’ve seen demand fall in China itself, albeit to be fair to China, China’s coming out of this and factories are reopening, but China is still very dependent on elsewhere in the world as well, for its demand.  So, I think recession is-, shouldn’t really use the word, but inevitable, but I think I probably would use the word ‘inevitable’.  

DG: I just wonder how your view of the economic impact of the coronavirus on the region, how that has evolved as the virus has evolved? When we saw the first reports of it emerging in China, at that point was your view that it would be something like Sars and obviously, since then it’s evolved in a very different and much more widespread way. When did you start to foresee that we’d have the unprecedented global shutdowns that we’re now experiencing?

HY: In many ways, we didn’t see it coming obviously so, for us as well, it was a matter of seeing how things rolled out.  Although, there seemed a period and there was certainly a period of a good month where the rest of the world seemed totally oblivious to what was going on because the shutdowns had already started here and clearly, people were worried about the spread of the virus.  Whereas, in the west as you heard, whether it be Trump or Johnson or whoever, people were treating it rather lightly. So, we saw it first here, which was why measures were put in place very, very quickly. So yes, it was something we saw coming far earlier here. As to the length and severity of it, again, even to this day we’re not necessarily-, well, we’re a bit wiser, but we’re not totally clear how severe it will be and how deep reaching it will be, but from what’s happening in the US and what’s happening in Europe, it looks as though it’s going to be pretty severe for a pretty long time, which means for many businesses, this year effectively, is going to be a write-off.

DG: Looking at your team’s flagship fund in the UK, ASI Asia Pacific Equity.  It’s down about 16% in the five weeks that have been the worst of the selloff.  The average fund investing in that area is down about 18% and obviously, any loss is painful and that is a big loss, but compared to the sorts of losses that we’ve seen certainly, in the domestic UK market, that’s not as severe.  Why has Asia performed-, it hasn’t experienced quite the punitive level of losses that other markets have during this crisis.

HY: I think possibly, for a variety of reasons.  One, in the first place, Asia hadn’t been as highly rated as other markets.  So, it wasn’t trading at higher rating in terms of price earnings ratios and the like.  So, it was not as, arguably, overvalued or as fully valued as other markets. Then also, arguably, Asia’s working its way through this, arguably, and it’s not a strong argument because certain countries are doing a good job and others are not, but Asia is working its way through better.  China is coming through it painfully, but it’s coming through it. Singapore, Hong Kong, other parts of the region are controlling it. Still big question markets over Indonesia, India and the less developed economies of the region and how well they handle things. Then certainly, when you look at our performance, I suspect we’ve done a little better, I mean it’s marginal, 2% better than a very sharp fall in benchmarks.  It’s very marginal and it can change on the day, as we all know, but again, key to our process has always been balance sheets. Little did we know, if you go back on previous interviews we’ve done, it’s always said, you never know when the proverbial is going to hit the fan, but when it does you really want a strong balance sheet. Little did we know, but we’d seen it in the Asian crisis where people borrowed US dollars, suddenly you couldn’t get refinancing, were carried out and fortunately, the memories of that remain fresh with many of the region’s managements.  So, amongst the companies in which we invest, the balance sheets remain really rock solid.  

AR: How, given that the virus has now moved from the east to the west and Asian countries-, like you say, we’ve been active in containing it, we’ve put out stimulus packages, does that mean that investors should be looking at, right?

HY: That they should be looking at.

AR: Asia.

HY: Well yes, I think they should.  Although, it’s very hard for investors at the moment to be concentrating and focusing on much, but absolutely, I think you’ve seen markets fall very sharply.  Asia has some great businesses. Providing those businesses are going to survive and there will be businesses that don’t survive what’s going on. Not necessarily, typically in the public sphere, but small, medium enterprises where cashflow has just dried up completely that will go to the wall.  Is this a time to be looking at Asia? Yes because the old arguments for Asia remain wonderfully the same and it’s a large chunk of the world still ultimately, fast growth potential and some great companies and depending how you do the valuations, which is not terribly easy at the moment because not necessarily all companies have visible earnings, but in certain cases some do, you’re seeing valuations at a reasonable level.  So, is it time to be looking at Asia? Yes. Much the same as it must be the time to be looking at most equity markets for the brave, but we’re not very brave at the moment.

AR: Would you recommend buying emerging markets or even China, for example, now that business is starting all over again?

HY: Yes.  I think so, yes, yes.  Again, the difficulty really depends on whether people have money or not.  So, it’s a bit like within our funds and our open-ended funds, surprisingly, we haven’t seen massive redemptions, but we’re certainly not seeing massive cash inflows.  So, although we’re sitting there saying yes, there are lots of shares that, by definition, are more attractive today then they were three months ago, we don’t necessarily have the cash with which to buy them.  We certainly think at these levels one should be putting money in where one has cash.

DG: If you did have the cash to buy it or maybe, more in terms of where you reallocate your funds across different countries, China in particular, we’ve had the business activity data out over night and very sharp rebound from admittedly, a fairly horrific February reading.  Is there a sense that China is-, it led the way into this crisis and it will lead the way out? Does China stand out within the Asia region as a particularly strong opportunity?

HY: I think economically, yes it does.  I think stock market-wise, that’s a slightly different answer, simply because the Chinese stock market has been surprisingly resilient.  So if you’re looking at the more bargain hunting, value end of things, you’d look elsewhere throughout the region, dotted really throughout the region, where stock markets have fallen a lot more sharply and again, who knows what’s going to happen, but providing we do get through this by the end of the year and that’s what I guess, people are looking at, at the moment.  It’s not the next month or two, it’s more the end of the year. Is there some great value to be had outside China? There’s some decent value to be had in China and some very decent companies there, but from a matter of buying things that have fallen very sharply, that clear value is outside China.

AR: Just back on China again, if you look at interest rates in China’s own banks, it’s taking steps to boost this economy.  Do you see more monetary based easing happening in the country?

HY: I think that’s going to happen everywhere at the moment.  That seems to be-, there’s one terrible cartoon somewhere, saying if the Martians invaded, they’d reduce interest rates.  It seems to be stock response by governments is massive, massive easing and you’re seeing that globally and I suspect you’ll see that again in China. You’re seeing it even in prudent Singapore and it’s still doing it prudently, but it’s putting together a massive package to try and keep the economy going.

AR: Do you think that monetary policy is enough to boost the economy?  

HY: Personally, no.  No, I don’t, but in some senses it’s that knee-jerk reaction of monetary policy and then, I think, really it’s going to have to be proper directed government spending, but that’s going to take time, obviously and a lot of what governments will be focusing on will be their citizens.

AR: Just to move away from China, just about India.  India too has gone on a 21-day lockdown. They’ve also introduced lending rates.  They’re also trying to do things to boost the economy. What is your longer-term view for India and what are your top holdings in the country?

HY: We’ve long liked India and we’ve been overweight India, gosh, must be for nigh on 30 years in our Asian portfolios. India is probably-, it’s been a profitable place to invest over those years amazingly, but it’s also one of the most frustrating places to invest because it’s got so much potential, but because of governance and various other things, it’s never quite achieved that potential and that certainly was one of our frustrations with India, despite we’ve got about 12% or so, depending what regional funds you look at, invested in India.  Even before this, the growth wasn’t quite coming through and the ratings were quite high, of companies. So, India was one of the more expensive markets and economic growth even before this had been a little disappointing. Great hopes for Modi and some great changes he had put in place, but still things not quite firing properly. Marginally because the mess the banking system is in. Providing the government really does try and sort those out, then you could see India rebound very sharply after this.

DG: Looking at your team’s funds in particular, broadly they’ve got very strong long-term track records, but have underperformed in recent years and you’ve long said that you tend to underperform in racy markets, but do better in tough ones.  I mean, this is certainly a tough market, do you see your positioning doing relatively well?

HY: One would hope so, yes and you’re right to criticise our performance.  We had a rocky period probably, now about three or four years ago. So, our performance last year and again, one shouldn’t really be looking at figures at the moment, but our performance this year.  So probably, last two and a half three years, we’ve clawed back performance which had dropped off, must have been I’m guessing, 2015, something like that. So, performance has been coming back quite strongly.  Of course, something like this can completely derail it and much as I’d like to clutch on to figures showing that we’ve outperformed in this fall, I think given the way markets move so much in a day, it’s rather unwise to rely on them, but generally, I think given our concentration on balance sheets, hate to use the word, maybe more a value inclination.  It’s not quite right, but it’s a glib shorthand, but yes of course, we have growth stocks within our portfolios, but we’ve still got a big chunk of very solid, sound companies with strong balance sheets. I think that probably should mean that we do relatively well, should mean. Obviously, in these markets, it means that we’ll lose a little less than the benchmarks.

AR: Aberdeen’s long-term emerging market allocation sectors are internet banks, retail, semiconductors.  Are you still seeing opportunities in these sectors?

HY: Well, we’ve still got large holdings in Samsung, Taiwan Semiconductors, Tencent, one of our large holdings.  So yes, they’re clear opportunities. There’re obviously also clear issues with everything virtually, at the moment, in this environment.  I’m not sure there are that many safe havens. So, it’s a matter of more, just keeping a balance within portfolios, topping up where possible, things that have really collapsed and taking bits and pieces out of companies maybe, where the share price has held up very well.  So, it’s at the margin.

DG: I guess one of the interesting things about this selloff, is that you mentioned Tencent and companies like Tencent and Alibaba, the really highly rated growth stocks that a lot of people thought would be the ones that would fall the furthest in the crash.  They’ve held up well because of their internet reliance and they come into their own in a world where vast parts of the global population are sat at home. Has your view on those sorts of stocks changed at all? Do you think other investors are likely to change their views on those sorts of companies?  

HY: I don’t think our broad views on them have changed, but you’re absolutely right, when everyone is sitting at home, they’re on the internet.  Tencent has a very strong gaming arm that we didn’t really invest in Tencent for, necessarily because that was its old business. Still a strong cashflow, but an old business and we invested for the newer businesses, but in fact, the old business is doing well in this environment.  So yes, if anywhere is a safe haven in these markets, it is businesses like that, able to transact on the net as we are-, Zoom, for example. So, yes.

AR: Just to sum things up, what do you think we should be looking out for in the coming weeks?

HY: I’m afraid this is not going to be very original and no great insight from Asia.  Obviously, all the coronavirus numbers, I’m afraid. We’re all looking at the same darn numbers trying to work out is it peaking, is it going away?  I think short-term obviously, that will largely determine what happens in markets. Then we’ll have governments coming out with various programmes as they have.  Changing the rules on a fairly regular basis and then, just listen to what the companies are saying and we’re keeping close touch with the companies in which we’re investing, but obviously, they’re not necessary-, well, they’re clear how their day-to-day business is going, but not necessarily any clearer on the long-term future.  So, I’m afraid it’s just reading those headlines that we’re all being mesmerised by.

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