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One of the true competitive advantages we believe we have at FSSA is a genuine long-term investment horizon. For us, investing is not about trying to predict which stocks will rise or fall next month or quarter; rather, it is a non-speculative activity aimed at participating in the long-term value creation we believe the best companies can generate.

Though Covid hasn’t yet finished with us, the markets have finished with Covid. In real life, there is still plenty of misery to go around, but in our opinion things have seldom been better for investors.

Fund Manager Q&A

50x P/E! 70x P/E! 100x P/E! Valuations that were outrageous just a few years ago are commonly bandied about by most of the investment community these days.

That would perhaps be an accurate description of what drove some of my portfolio decisions as a young fund manager, roughly 15 years ago during the global financial crisis (GFC) meltdown.

As with global automotive manufacturers, several Indian automotive original equipment manufacturers (OEMs) including Maruti Suzuki, Mahindra & Mahindra (M&M), Tata Motors and Eicher Motors have recently announced that the shortage of semiconductor supply has impacted their production schedules.

After a recent meeting in Mumbai with the top management of Mahindra & Mahindra (M&M), we came back with a clear message

Land, Labour, Capital and Entrepreneurship. These are the well-known “Factors of Production” as defined by classical economists. The Entrepreneur (or Company) is the one that combines these factors to earn a profit.

We had entered the meeting with a leading air-conditioner company in our portfolio worried about the risks to its growth and profitability, as the second wave of Covid-19 affected consumer demand and raw material costs rose sharply.

FSSA India webcast focus on the India Subcontinent Markets and Asia Pacific equities

Looking back over 2020, a challenging year for many reasons, there were two key investment decisions that helped the performance of the FSSA Japan Equity strategy.

In our last client update in February 2021, we discussed the reasons we resisted the temptation to switch into pure cyclicals and so-called “value” stocks — even though we had anticipated a sector rotation in the market (the TOPIX subsequently peaked in March 2021).

Strategists often argue that Japan is perhaps the most cyclical market amongst the major global economies, with profits highly correlated to global trade. We disagree.

The performance of the FSSA Japan Equity strategy has been under pressure year-to-date, driven by a violent style and sector rotation from quality growth to financials and cyclical companies.

FSSA Investment Managers has been investing in Asia and global emerging markets for three decades.

China made headlines for watering down coal reduction targets during COP26, but we think the criticism is unfair.

What is your view on the tightening regulations on Chinese tech companies? What are the impacts on the companies in the holdings (Tencent, Alibaba, JD.com) and do you see it as a structural headwind for the sector or an accumulation opportunity?

Despite China being the first country to face the challenges of Covid, early optimism around its control over the virus seems to have waned.

What will 2021 look like for China? 2021 will be a year of recovery. This is not surprising given last year’s economic downturn. If vaccines are being rolled out gradually during the year, we believe the economy will recover, especially those sectors that have been hit hard like travel.

Given its size and influence, China remains a key investment destination despite ongoing trade disputes and diplomatic tensions with the US and Australia. With a GDP equivalent to around 70% of the United States, many global portfolios continue to feature Chinese equities.

While the pandemic is still far from over, a number of key leading indicators point to a healthy and broad-based recovery in China. Industrial production, trade activity and retail sales have been strong; and in stark contrast to the lockdowns and travel restrictions in early 2020, domestic travel, tourism and the leisure sectors in China have sprung back to life.

Once again, 2021 was a year full of surprises and challenges, with ongoing Covid disruptions and China turning from a global outperformer to underperformer.

The pandemic has accelerated certain long-term shifts in consumer behaviour, such as using more online orders for everything from clothing to food. The latest battleground appears to be groceries, but the disrupter emerged from a not-so-new technology — WeChat groups.

Firstly, regulations are nothing new — it has always been a part of the investment equation. If we look at Hong Kong or Singapore for example, the government would introduce new regulations on the property market from time to time;

Since our last update, global markets have not been short of action and the manic behaviour characterising today’s markets has taken investors on another rollercoaster ride. While not quite comparable to the market movements seen during the dark days of March 2020, the recent correction — especially in China-related companies — has been notable.

Since our last update, the initial public offering (IPO) frenzy we have observed for the past 12-18 months has continued unabated. This is especially true in India where there have been around 100 IPOs so far this year.

Over the past few years, global emerging market (GEM) investors have dealt with a series of challenges, including a surging pandemic, local lockdowns and widespread travel restrictions.

In almost every meeting that we have with management teams, we will ask about incentivisation. In our view, it is an important question and the answer can be highly revealing about an organisation’s culture and behaviour.

Albert Einstein famously said, “Not everything that can be counted counts and not everything that counts can be counted.” This holds true in many situations, but we think it is especially true when it comes to risk management.

In our last client update, written through the depths of Covid-despair, we observed that real life and the world of markets are seldom so intimately entwined. With markets swinging violently to the downside on a riptide of fear, it was clear even then that activity was being driven by short-term anxiety rather than a real evaluation of Asia’s longer-term value-accretion prospects.

As the world continues to lurch from Covid-surges to reflexive and localised lock-downs, everybody is now looking through to a mythical status quo ante bellum – the before-Covid-times, when the world was just hunky-dory.

As many economies have bounced back from the worst of the pandemic, concerns about central banks, the rate of money-printing and inflation have returned. Markets have responded to the arrival of better times by selling off bonds and bond-like equities.

As Asian countries become richer, they have been transitioning towards consumption-based economies, translating higher per capita income into increased spending across goods and services.

Many people seem to think that money management is about predicting the future. But even with the gift of perfect foresight, the subsequent market reaction to news is often far from obvious.

Every downturn is different – the Global Financial Crisis and the Asian Financial Crisis were primarily debt-related, while SARS and Covid are obviously health-related, with a knock-on effect on growth and consumption.

Top Glove is one company identified as part of this engagement as having high exposure to modern slavery risk in light of the COVID-19 pandemic. The company is the world’s largest manufacturer of rubber gloves, specialising in examination, surgical, household and industrial gloves.

As bottom-up investors, the FSSA team carry out well over 1,500 meetings each year to assess company managements’ capabilities and the underlying strength of the franchises they run. These monthly manager views are based on the team’s discussions with company management and the in-depth analysis that follows.

We have just returned from India — the first investment research trip in India for our entire team in over two years. It was a liberating break from constantly hearing “You’re on mute!” on video calls...

As the saying goes, “There are two kinds of forecasters: those who don't know, and those who don't know they don't know.” Recently, we have seen hordes of the latter kind, garbed as analysts, Unicorn founders, freshly-minted CEOs and so-called “experts”, as they engage in modern-day snake oil salesmanship, which is what seems to pass for Fundamental Equity Research these days.

We have written about the spate of Initial Public Offerings (IPOs) in India and our reasons for staying away from them, for the most part. This time, we want to talk about why new listings are important to keep the market vibrant and to keep the entrepreneurial spirit in the country alive.

Corporate India’s resilience has been severely tested over the past decade. Since 2010, there has been a long, drawn-out downturn, caused by a series of corruption and scams, a banking and financial crisis, and now a devastating health pandemic.

As bottom-up investors, the FSSA team carry out well over 1,500 meetings each year to assess company managements’ capabilities and the underlying strength of the franchises they run. These monthly manager views are based on the team’s discussions with company management and the in-depth analysis that follows.

Every company we speak to these days tells us about the cost pressure that they are facing, emanating from rising global commodity prices. Domestic steel prices have risen by 35% y/y, copper by over 50% y/y and palm oil by over 60% y/y through February 2021.

Our investment philosophy is to back owners and managers with whom we feel strongly aligned. These owners typically have track records of treating all stakeholders fairly, in both good and bad times.

The most attractive point about India is that there are about 6,000 listed companies across a diverse range of sectors. That gives us the opportunity to invest in high quality businesses across a range of industries.

As disposable incomes have grown, we find that Indian consumers are now moving up the ladder to buy more premium products, or buying discretionary products they could not previously afford.

The FSSA Japan Equity strategy declined by 3.0% in December and 18.8% over the month of January, driven first by a sharp “growth to value” rotation and then a sell-off by foreign investors from mid-January onwards. This has been a global phenomenon, with high-valuation growth stocks in most developed markets facing similar sell-offs on concerns about inflation and interest rate hikes.

Given inflation levels are picking up around the world, why is this not a problem in Japan? There are fundamental differences in Japan’s economy to explain this. First, underlying consumption has stood still in the past decade or so.

In this China update for mid-2022, we discuss some recent topics of interest as highlighted by our clients.