Asian/emerging Equities

China Tech: From Cubs to Pandas

By | 2017-10-17T10:34:04+00:00 March 24th, 2017|Asian/emerging Equities, Bottom Up, Cerno Capital Posts, Cerno Capital Posts|

China’s technology sector, once a discretionary purchase within a regional portfolio, now deserves scrutiny. China is a place where Google, Facebook and Twitter simply do not exist. Their analogues do. In their place stand Baidu and Tencent. Alibaba is a much more significant concern than Amazon. The digital economy is thriving. E-commerce penetration has overtaken the US, as has mobile payments, led by Alibaba (AliPay) and Tencent (WeChat Pay), where the value of transactions dwarfs the US by nearly 50 times. The army of Chinese netizens pay for almost everything from goods and services to bills and insurance via one of the two payment systems available on a smartphone. The internet is one area where foreign brands do not possess any competitive advantage over indigenous brands. China’s netizens have never become accustomed to Google, Facebook, and Twitter. This is in part due to regulation: popular social media sites are often blocked by the “Great Firewall”, and Google left the country some years ago over censorship disputes. The latest to fold has been Uber, which decided to sell its local arm to Didi Chuxing, a Chinese competitor, after burning through billions of its investor money. Nor is this just a matter [...]

Japan – Restructuring of Positions

By | 2015-11-13T11:37:02+00:00 November 13th, 2015|Asian/emerging Equities, Asset Allocation, Cerno Capital Posts, Cerno Capital Posts|

Japanese equity, which has been a consistent allocation within our client portfolios since 2011, now stands at a twenty percent weight. Within this allocation, the precise expression has changed over time. Our approved list provides us with the necessary toolkit to alter allocations in response to changing drivers of the Japanese stock market. At present, half of our Japanese allocation is to the Lyxor JPX Nikkei 400 tracker. This ETF is assembled of companies, predominantly large caps, which score favourably on a shareholder value creation ranking. The Japanese equity market is attractively valued and we anticipate further improvement in return on equity (ROE), which currently averages nine percent across the corporate universe. With his triumvirate of ‘arrows’, Japanese Prime Minister Abe introduced measures to reform corporate governance and refocus corporate attention to the shareholder. These aim to prompt companies to allocate capital more efficiently and target returns on equity above the cost of capital, or to return cash to investors in form of higher dividends and share buybacks. To encourage companies to adhere to these principles, the Japanese Exchange Group (JPX, world’s third largest bourse operating the Tokyo Exchange amongst others) and Nikkei have jointly created the JPX Nikkei 400 [...]

The Strain in Strine – Australian Macro

By | 2015-06-04T09:25:12+00:00 June 4th, 2015|Asian/emerging Equities, Asset Allocation, Asset Class Returns, Cerno Capital Posts, Cerno Capital Posts, FX and Rates, Regions|

For the unconstrained global investor, Australia is a prospective hunting ground for profit. Any comprehensive analysis of the main trade and capital trends at work in the world find their conflux in Australia’s capital markets. Predicated on China’s fixed asset investment boom over the past quarter century, Australia’s economy has been substantially driven by demand for its ores and minerals. It relates uneasily, it seems at times, on account of deep cultural differences, to the rest of Asia, in particular Indonesia. Australia is an affluent, urbanised society. It is, above all, a consumerised population that is, in economic jargon, fully financially included. It has an independent central bank and currency. On account of these features, backed by disciplined capital markets and secure laws, Australia’s equities, government bonds and currency have been a destination for macro investors of all stripes, including hedge funds. We measure recent opportunities by looking at 12 month rolling returns of its currency, benchmark bond and main equity index. Source: Morningstar/Bloomberg When the currency is weakening, returns from key asset classes are crimped, as can be seen in the below chart. Source: Morningstar/Bloomberg The tricky thing with macro investing, prosecuted via Australian instruments, is the various counter [...]

Demand Shift – Japan Has a New Marginal Buyer

By | 2015-04-13T13:17:01+00:00 April 13th, 2015|Asian/emerging Equities, Bottom Up, Cerno Capital Posts, Cerno Capital Posts, Developed Equities, Regions|

Last year, the Japanese Government Pension Investment Fund (GPIF) announced its intention to cut allocations to low yielding government bonds and to double its exposure to domestic equities. The logical pretext for this decision is the need to achieve higher returns to cover increasing pension payments to the country’s aging population. After decades of overweighting bonds - which benefitted from Japan’s deflationary environment - policy changes by Prime Minister Abe, set out to boost risk assets and to introduce inflation, gave this move further urgency. The new asset allocation came into effect on 31st October 2014. The table below outlines the extent of this change and alludes to the impact it had so far in monetary terms. Source: BCA Research, GPIF Data from BCA Research shows that the world’s largest pension fund, with total investable assets of Y138 trillion (US$1.14tr), has shifted close to US$90bn into domestic equities in the fourth quarter of 2014; still 5% (US$59bn) below its new target allocation of 25%. A further three Japanese public pension funds, managing assets in the region of US$250bn, are expected to follow suit this year. An estimated 13% increase to their allocation would add a further US$33bn in net new [...]

The real sea change in Japanese equity is coming

By | 2015-04-09T08:39:57+00:00 April 9th, 2015|Asian/emerging Equities, Asset Class Returns, Cerno Capital Posts, Cerno Capital Posts|

There is a sea change in corporate behaviour in Japan that is leading to a focus on capital efficiency, return on equity and higher dividends, as well as share buybacks. Valuations and earnings growth are favourable compared with other markets at a time when foreign investors are underweight and have been selling the market. Deflation has de facto ended, with rising wages, rising rents and better domestic consumption. Everything is in place for Japan to be one of the best performing major equity markets. The Nikkei 225 has rallied by 112% in total return terms since December 2012, when prime minister Shinzo Abe came to power. Owing to very strong earnings growth – 20% in 2014 – valuations are attractive. Japan is the only major developed market with lower price-to-earnings ratios (P/Es) now than in 2012. Japan’s forward P/E trades at 13.6x versus 17.3x for the US and 16.4x for Europe. On a price-to-book basis, Japan trades at 1.4x, which is the cheapest of all the major regions. Rising returns Return on equity (RoE) is rising, with corporate governance improvements driving profitability as shareholder returns increase. The focus on returning cash to shareholders and driving up RoE is now widespread across [...]

JPX Nikkei 400 Index – a new way to do Japan

By | 2014-10-08T13:30:36+00:00 October 8th, 2014|Asian/emerging Equities, Cerno Capital Posts, Cerno Capital Posts, Developed Equities, Regions|

After decades of subdued growth, Japanese equity markets rallied in 2013 following Abe’s election and announcement of his triumvirate of measures. The three arrows, as his policy approach is called, consist of monetary measures, fiscal measures as well as growth oriented structural measures. The first two of these have been implemented early on and were well received by investors. Japan outperformed other developed markets returning +55% in 2013 compared to +34% for the US and +21% for Europe. However, Japanese equity returns this year have been held back by scepticism over the potential success of Abe’s third arrow. The TOPIX index is flat on the year at the time of writing, compared to +8.6% and +5.5% for the US and Europe indices respectively. Structural measures envisioned as part of the third arrow aim to improve companies’ capital efficiency to promote economic growth. The main provisions of this program are to encourage companies to allocate their cash more efficiently and to promote corporate governance. Japanese companies have been notorious for hoarding their cash over the last few decades, a habit which gained new life following the Global Financial Crisis. In the reflationary environment that the government wishes to create, cash becomes [...]

Lifting the kimono on a misunderstood Japan

By | 2014-09-23T11:48:40+00:00 September 23rd, 2014|Asian/emerging Equities, Asset Allocation, Cerno Capital Posts, Cerno Capital Posts, Developed Equities, General Investment|

“It is not unnatural that, perhaps, in this matter of being misunderstood, Japan has more reason to complain than any other nation in modern times”. These words were written in 1900 in a book titled Misunderstood Japan. After stellar returns for investors last year, the Japanese stock market has been much less exciting this year. The numbers on the external accounts have been poor and this has prompted questions about the Japanese recovery. We have retained our allocation to Japanese equities which remains our largest single country allocation. We believe that the deflationary pall has lifted and that improved capital efficiency of companies will deliver higher profits and so significant returns to shareholders. The move out of deflation and to higher profits is only just beginning, meaning that the rerating of valuations in the market is at a relatively early stage. Figure 1. Share buyback Programs Source: Goldman Sachs. As at 8th September 2014. One of the key features of improved corporate profitability is shown by the introduction of the JPX Nikkei 400 index. This is an index of the most profitable companies. Sony and Panasonic have been excluded, a shaming omission perhaps. This plays into the ‘shame culture’ in [...]

Why we remain in Japan

By | 2013-12-02T17:11:50+00:00 December 2nd, 2013|Asian/emerging Equities, Cerno Capital Posts, Cerno Capital Posts, Developed Equities, Regions|

Japan has been the stand out equity market of 2013, rising 50% in Yen terms during 2013. We explain the reasons for our continued interest in this equity market despite these gains having already been recorded. • Valuations on the Japanese market remain attractive. Although the market is up approximately 50% YTD, earnings per share have increased by 36%, so in price earnings terms the market is not much more expensive than at the beginning of the year. The PE ratio has actually declined from 18.0x to 16.8x. When looking at asset values the price to book ratio in Japan is 1.27, which has risen from 0.9x a year ago. This compares very favourably to the US equity market that trades at 2.6x price to book. • As the world continues to heal after the stresses of 2008, we can expect a normalisation of US interest rates to equate to higher US bond yields. We expect this will drive the US dollar higher against the Japanese Yen over the medium term. A weaker Yen is likely to be bullish for the Japanese stock market, with its high degree of earnings from exports overseas. • Japan is one of the few [...]