As US tension with North Korea mounts, just how is the geopolitical instability impacting the rest of Asia from an investing standpoint? Kim Parlee talks with Paul Danes, co-manager of Asia portfolios at Martin Currie Investment Management, and manager for the TD Asian Growth Fund, on the risk and opportunity of investing in Asia.
The problem with North Korea in terms of analyzing it from an investment point of view is twofold. One is that there really are no experts who I can consult with, and that's one of the problems. And the second problem is it's inherently unpredictable, and that unpredictability maybe is magnified by some of the differences with this episode and the past. So one is that we've got Trump in the White House, and I think that's more unpredictable. And the second thing is that it does seem from the latest tests that North Korea do have some sort of nuclear capacity. And I think that makes, you know, much, much more serious than the past examples.
But the way we think about it is the consensus at the moment is that there's a lot of brinkmanship, and eventually, there's some talks, and it all settles back down. We de-escalate. In that case, what you have to remember is that there will be very little impact on the economics, very little impact on companies. People don't change their behavior, and that's the most likely outcome. So that's what we have to assume.
The one thing that actually does worry me from a very practical purpose is I think a lot of the politicians in the West assume that all they have to do is get China on their side to sort out the problem. That, I think, is a miscalculation.
China does not control North Korea, for one. And secondly, their influence has waned a lot in the last two years. They've already cut a lot of the trade, so if the US, for example, targets China with a trade war to try and pressure them, I think we've got a real stalemate. And that's where there could be trouble. It's not catastrophic, but there could still be market implications.
OK, let's put that one aside just for a moment and talk about just everything else that's going on in the region. And again, I realize this is a massive region to be kind of covering in a few minutes. But India has gone through some pretty massive change, and you and I were speaking earlier. You talked about-- what was it? Demonetization? Is that what they went through?
So tell me a bit about just some of the things they've been doing. And what is that going to mean for them moving ahead?
Yeah, so actually, reading sort of the economic numbers or the company earnings at the moment in India is really, really difficult, because there's been all these special situations. So one is the one you mentioned, demonetization. What that was, back in November last year, overnight, they voided 86% of all the notes in circulation. Obviously, suddenly, nobody had any money. They had to go to the bank and change it for new notes. There wasn't enough new notes, so consumption almost froze for several months and is only now recovering.
And why did they do that, again?
Well, the idea was to get rid of corruption and punish people for having what they call black money, bribes hidden under the mattress. Actually, it's failed, because apparently, according to the Central Bank, 97% of that money found its way back into the banks. But interestingly, the Indian people seem to have quite liked it, because at least Modi was trying to do the right thing, even though it wasn't successful. So you've got that problem. You also had lots of tax changes, and that's hit consumption and investment.
So the problem is, if you look at the economic growth in India today, it's definitely been disappointing. If you look-- because I do-- at company earnings, that has definitely been disappointing. But I think as we go into 2018, and we sort of roll back, that gets forgotten a little bit, and we roll forward. Actually, India's one of the few places in Asia where earnings and GDP is going to accelerate into 2018.
Oh, is that just a case of lapping poor earnings, or is there actually real growth that's going to be going?
Well, there certainly is lapping the poor earnings, but also, if you think about something like consumption, there are quite good signs that, particularly rural demand, which is a very important part of demand in India, is beginning to recover. And that could be quite exciting.
I feel I'm not doing justice to this, but I'm going to move on to another massive country, China. It's interesting, because China was something I'd say that the financial media was obsessed with for the past, I don't know, five years. And we actually are not hearing a lot. I mean the last thing I think I really heard in Western mainstream media was talking more about the Chinese Congress, what happened, but then we haven't heard much since. So what's your take on what's happening?
Yeah, well, I think what happened is people were really concerned that China was slowing down, for one thing, and there was a lot of speculation that the currency might devalue significantly. The Chinese government have basically done sort of what I call counter-cyclical policy, so they've reflated the economy. They had some capital controls to control the currency, and they've done a really successful job of getting out of trouble. So the economy today is ticking along very nicely. The IMF just upgraded their estimates, I think, 6.7% growth for 2017. It all looks pretty rosy today, and people are actually worried, if anything, about an appreciation of the currency.
The only problem with that is, what you have to remember is there's some structural issues in China, whether it's the amount of leverage, whether it's the bad debts of the banks, and every time they reflate, they actually cause those troubles to be delayed in terms of fixing them.
Do they make them worse, or is it just delayed?
Well, they temporarily make them worse. So what I now expect and what's happening today is they're now-- they're doing the reverse again, and they're tightening credit. So it's a very-- it's a very interesting thing. But right today, the economy's in good shape. The company earnings are really growing very fast, so I think the expectation's for 15% plus earnings growth this year, which is pretty much the best in Asia. And the valuation is still very cheap, so actually, we really like the Chinese market.
Let's talk about-- we're going to go straight from macro, high level, right down into micro. You, obviously, manage a fund or many funds, but let's talk a bit about what you find attractive and why within that, and get the mechanics.
Yeah, well, so for example, in the TD Asian Growth Fund we manage here in Canada, we've got quite a big overweight in what I describe as North Asia, particularly in China. So I've talked about-- I think it's got one of the best earnings growth pictures in Asia. It's also got some of the best valuations in Asia. So we've got quite a big weighting in China. Within that, we are very keen on the technology space, so that's-- for example, in China, it's the internet space, things like Tencents and Alibaba, very well-known companies. But in Korea and Taiwan, it's things like the semiconductor companies, where you've got big weighting. They're you'll see benefiting a lot from the new iPhone launch, recently, for example.
And it's quite interesting, actually, but when I think about it from a Canadian point of view, the opportunity in Asia is very, very different. So we've got lots of technology companies. We've got lots of companies exposed to sort of emerging consumer, emerging middle class, and we have almost no energy, no commodities. So it's kind of an interesting fix, actually, for Canadian investors.
A nice offset, completely, I guess, for people who are trying the domestic economy. What about India? Anything interesting in that area?
Well, in India, there's two areas we really like from a business point of view. One is the consumption story, as I described, the rural recovery of demand. So we own some auto companies and motor bike companies in India. We also really like the private sector banks, who are taking huge share from the state-owned banks, who have lots of balance sheet problems, so aren't really lending at the moment. The problem with those is they're very expensive, so we don't actually-- we're not actually investing those, but we love the businesses.
What do you think are going to be-- and I know it's a very heterogeneous region. I mean that's one of the keys, but if you and I are sitting down one year from now, what are you going to be looking for to really see that there has been proper growth or real excitement in certain areas?
Yeah, well, I suppose if you think about Asia as a whole, one of the problems has been that consumption has been really disappointing for the last two or three years, particularly, for example, in the ASEAN region, so that's Southeast Asia, places like Indonesia, Thailand, Malaysia. Those countries really haven't grown as we would have expected, given their sort of growing populations and increasing wealth. I think what'd be really interesting, if they really break out in terms of consumption, that would be very exciting for Asia.