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When China reopened at the end of 2022, domestic stocks had a V-shaped rebound, analysts raised their earnings forecasts, and companies prepared for a steep recovery in the economy. But the market’s optimism soon faded and turned into disappointment.

Emerging markets: quality from a broader stakeholder context

Sree Agarwal and Shivika Srimal, investment analysts at FSSA Investment Managers, believe there are a number of reasons to be positive on India in the long run, and shared their rationale at the FSSA Forum 2023.

In the final article of this three-part series, Martin Lau, managing partner and lead portfolio manager of the FSSA China Growth strategy, discusses the importance of keeping a long-term mindset and valuation discipline as the strategy celebrates its 30th anniversary this year.

In the first article of this three-part series, Martin Lau, managing partner and lead portfolio manager of the FSSA China Growth strategy, shares his reflections on the past three decades of investing in China markets as the strategy celebrates its 30th anniversary this year.

In the second article of this three-part series, Martin Lau, managing partner and lead portfolio manager of the FSSA China Growth strategy, discusses the importance of keeping a long-term mindset and valuation discipline as the strategy celebrates its 30th anniversary this year.

Most people in North America and Europe hold a negative view of China, according to a recent survey. This is hardly surprising given the portrayals in Western media – a Google Images search for “China” and “The Economist” returns front-cover headlines, such as: The brutal reality of dealing with China, Trade without trust, and America v China; it’s worse than you think.

In the Asian markets, investors have gone from “anything, as long as it’s China” to today’s high levels of fear and disbelief, but that is typical when markets fall significantly.

India's economic prowess has become a focal point for institutional investors eyeing long-term growth. Traditionally, investors lean towards Global Emerging Market (GEM) strategies to tap into this opportunity.

In our team, mistakes are teachable moments to be shared and learnt from. Thankfully, for us and our clients, in our history of investing in India we have managed to avoid the big ones.

Uncover the untapped potential of Asian markets and emerging economies, as the article explores rebound opportunities and strategic moves in the FSSA Asian Growth Strategy portfolio.

At FSSA, we are long-term, bottom-up investors with a focus on quality. This mind-set also applies to how we engage with companies on Environmental, Social and Governance (ESG) matters.

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

2021 will be a year of recovery. This is not surprising given last year’s economic downturn.

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. Now, an escalating conflict between Russia and Ukraine has raised fears that this could spill over into Europe and beyond.

The year 2023 turned out to be fairly pedestrian in terms of emerging markets’ performance. The asset class was weighed down by China, which recorded its third consecutive year of negative returns.

As investors focused on quality, one can easily “fall in love” with an investment and be too forgiving in certain situations, potentially missing important warning signs or sell signals. One question that we frequently get relates to a common behavioural bias for quality investors: how do we balance admiration for a company without becoming too complacent?

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.

Looking back (though it’s not like we didn’t already know), it is clear that we have been living in an increasingly distorted world. Financially, for the last decade, it has been about interest rates falling to (and staying at) zero in a world of general money printing.

With over 20 years managing money in China I have seen significant changes both in the corporate and investment environment. One of the biggest shifts that has occurred is the fact that China is not short of investment capital.

Lee Kuan Yew, although somewhat a polarising figure, perhaps understood state power and the human condition better than anybody. Consequently, Singapore has often been criticised as much as it has been greatly admired. Irrespectively and without question though, the country has gone from strength to strength.

How is the FSSA Asian Growth portfolio positioned in light of the challenging market environment?

After a recent meeting in Mumbai with the top management of an Indian conglomerate group, we came back with a clear message — the group's commitment to its purpose does not mean that it will continue to operate loss-making businesses.

In the first three months of this year, 17 new companies have listed on the mainboard exchanges in India, more than in all of 2019 or 2020.

Over the last few years, we have been selling many companies which have become expensive. On the other hand, there are still companies that are attractively valued with robust growth ahead.

FOMO, 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.

FSSA Investment Managers, Indian equities, Road to Recovery

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.

Whilst valuations of many small and mid-cap companies are questionably high, we are being prudent; and we believe there are a number of reasons why India’s premium is well justified.

China made headlines for watering down coal reduction targets during COP261, but we think the criticism is unfair.

Following on the FSSA China Growth strategy’s 30th anniversary, we sat down with our China portfolio managers Martin Lau, Winston Ke and Helen Chen to respond to recent questions from investors. In this Q&A, they discuss market valuations, inflation, geopolitics and recent company visits.

China equities have rebounded sharply since early November as the Covid Zero policy drew to a close. If we look back over the past decade, the last two years presented the most difficult stretch for us as China equity investors.

The country’s biggest bricks-and-mortar grocery chains are fighting back against online competition.

In response to the recent client interest around China’s market and the challenging performance year-to-date, we had a conversation with Martin Lau, managing partner and lead portfolio manager for the FSSA Asian Equity Plus and FSSA China Growth strategies.

After Chinese stocks rallied upon the abrupt end to pandemic lockdowns in late 2022, pessimism has taken hold of the markets again. This time, concerns include the uneven post-Covid recovery, the lack of stimulus and weak external demand.

Since we last wrote, roughly three months ago, investors in emerging markets have had to reconcile themselves to a stream of disappointing headlines from several key countries. We are often asked about our own views on politics and macroeconomics, and how we incorporate them into our investment process.

Mutations, it would seem, are not unique to the virus. Starting with some housekeeping, we always end our letters seeking feedback from our regular readers.

As long-term, bottom-up investors, our starting point for finding suitable investments is to seek out companies that benefit from structural tailwinds and have clearly-defined competitive advantages.

I started my career more than 18 years ago as a developed markets consumer analyst. It was a great introduction to investing — the consumer sector is extremely broad so I was able to gain experience across many sub-industries and look at a wide variety of companies.

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.

Five years ago we launched the FSSA Global Emerging Markets Focus strategy. It has been an interesting time to invest in emerging markets.

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 things have seldom been better for investors.

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.

Markets will always do their best to push us to act in a short-term and emotional manner, particularly at times when events become somewhat extreme. These days all of us, market participants or not, seem almost entirely focused on uncertainty rather than promise. This is why having a strong philosophy and process is crucial.

In our last update, we touched on the idea of high-quality companies hiding in small market capitalisations in ASEAN . This, in our view, is due to years of declining foreign-investor interest in the region. These companies are usually not covered in great detail or indeed at all by sell-side research analysts.

Ten years ago last month, I assumed lead management responsibilities for the FSSA Indian Subcontinent strategy. How time has flown!

“We already have (exposure) to India via our Asia and Regional strategies.” We often hear this comment from prospective clients who are considering an investment in the FSSA Indian Subcontinent strategy, but are not yet convinced that a dedicated allocation would indeed be worth it. Call us biased, but we have been arguing in favour of a standalone investment in India for many years.

In the FSSA GEM Focus strategy we own high-quality businesses which have competitive advantages such as strong brands, distribution advantages, cost leadership, or simply providing a service/product that customers cannot live without. Historically, this has given them pricing power and the ability to preserve margins despite adverse headwinds.