Unfortunately, in recent times, developed markets have been veering on a downwards trajectory as global growth concerns come to the fore once again. The negativity is built on a number of fronts: geopolitical issues and poor macro-economic numbers adding fuel to deflationary fears in the Eurozone; the possibility of disorderly sell-off as the US Fed starts to raise interest rates; idiosyncratic scenarios such as ISIS and Ebola materially impacting investor sentiment.
In contrast to the developed market gloom, the Asia-Pacific region is, we believe, different: there’s a powerful ‘reform’ agenda creating specific catalysts which may drive markets there. With changes of leadership in China, Thailand, India and Indonesia, a region-wide clampdown on corruption and a drive to improve efficiency, investor perceptions are beginning to shift for the better, along with share prices. The improving backdrop warrants a closer look.
Chinese SOEs – the lumbering giants are getting fit
State-owned enterprises (SOEs) have been instrumental in the Chinese economic growth story. Recently however, there has been a drive to reshape these bloated structures into companies focused on shareholders rather than market share or job creation. The hope is those SOEs with improving operating efficiency should contribute to China’s economic growth, reinvigorate private sector investment and help revitalise the economy by creating a more competitive business environment. Coupled with President Xi Jinping’s well-publicised anti-corruption measures, this is likely to improve investor returns in the medium-term. The SOE, PetroChina, is one of our top picks. The new management, installed in 2013, is more focused on the returns from invested capital, which should resonate well with external shareholders. Other SOE energy providers that have made positive progress in restructuring have outperformed the overall market. Furthermore, we believe PetroChina is well positioned to benefit from recent gas pricing reform: the government is raising gas prices by effectively linking them to oil.
India – powering forward
Across the Bay of Bengal, ‘Modi Mania’ for the newly-elected Prime Minister, Narendra Modi, is beginning to drive real change in political and economic attitudes. Expectations are high, and there is already evidence of the new administration beginning to address legacy stalled projects, by simplifying project approval and land-acquisition processes.
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