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Less loved but good value; investors in Asia look to buy on the cheap
[SINGAPORE] In a world of slack growth and low returns, investors have been flocking to Asian companies with booming businesses and profits. But with these stocks now the priciest in 13 years relative to less loved firms, funds are starting to explore cheaper names.
Fundamental factors are signaling to investors that they are missing out on good value in some of the less exuberant firms.
The gap between the average price-to-forward earnings ratio of the MSCI Asia ex Japan growth index and the MSCI Asia ex-Japan value index is the widest since at least 2003, based on the earliest available data on Thomson Reuters DataStream.
This extreme gap has been underpinned by relentless demand for high-growth stocks as a sluggish global economy has starved investors of attractive returns. But some investors, loath to overpay for crowded trades, are turning to cheaper companies that have been overlooked and undervalued. "We think the value gap is extreme and there are some very attractive opportunities in value stocks," said Matthew Vaight, portfolio manager for global emerging markets at M&G Investments in London.
The Asia growth stocks index is now trading at 17.3 times 12-month forward earnings, compared with its historical average of 13.7, the most expensive since the global financial crisis in 2009.
While the high multiples are a salient feature of many growth stocks, whose earnings are expected to rise faster than their industry or market average, fund managers caution investors against overlooking value stocks that usually trade at a lower price than their fundamentals suggest they should.
Indeed, the value index is significantly cheaper, at 10.1 times earnings, below its average of 10.6 times. The broader MSCI Asia ex-Japan benchmark is trading at 12.7 times earnings.
Norman Boersma, chief investment officer of Templeton Global Equity Group, said the valuation gap indicates the risk-reward proposition is now skewed in favour of long-term value investors.
"If you're looking for something that's safe or has good growth rates, if you're buying into an area where valuations are hugely elevated, that doesn't really look safe to me," he said.
In fact, a turnaround may be in the offing.
The value index slid 14.7 per cent in 2015, almost double the loss of the growth index. But this year the value index has only slightly underperformed, rising around 7.5 per cent versus a 9.7 per cent gain for the growth index.
A look at a few companies provides a compelling case for value-investing.
For instance, the most expensive company in the Asia ex-Japan equity benchmark, Ctrip.com, a fast-growing Chinese internet travel services provider, trades at a whopping 268 times forward earnings.
Compare this with the cheapest: Korea Electric Power, priced at 4.34 times earnings, and Chinese Chongqing Changan Automobile, at 4.43 times.
But investors such as Peter Sartori, head of Asian equity at Nikko Asset Management in Singapore, remain unconvinced given the tepid global growth environment.
"Most of the so-called cheap value-type sectors in Asia are in areas of the economy that are not where the growth of future Asia is," Mr Sartori said.
Analysts say the materials sector might prove a risky bet as its fundamentals are closely linked to China's uncertain economic outlook. However, those that have been indiscriminately sold off - such as energy and financials - may offer bargains.
Templeton's Boersma flags opportunities in industries that are not so cheap, such as technology and healthcare.
"In healthcare, biotech stocks have been pushed through the roof," he said. "But we've found a lot of value in the older guys, with nice cash flow, reasonably stable earnings growth, good dividend yield."