Joseph Lai, Platinum Asia Fund

The Platinum Asia Fund invests in companies across the Asian region, but China is one area holding a special interest. As the world's second-biggest economy and Australia's largest trading partner, it's somewhat surprising that most Australian investors are totally unexposed to Chinese stocks. Platinum portfolio manager Joseph Lai spoke to InvestSMART editor Tony Kaye about the opportunities in the market there, especially given the recent inclusion of Chinese A class shares in the MSCI World Index. In short, he believes China is definitely worth exploring as an investment location.

Tony Kaye: Joseph, thanks for your time. As head of the Platinum Asia Fund, what are you thinking at the moment in terms of Asian markets generally, and which markets in particular? There's quite a lot going on, isn't there?

Joseph Lai: Yeah, well, the fact is, there's a few things to say about Asia. The big thing I think people really should understand, or get through their head, is just the scale of the place. It is half of the world's population in Asia: India, China, and Korea, even if we exclude Japan, because it's just a different market. These countries, some better than others, are improving their productivity or quality of life by adopting technologies. As you can imagine, in five, 10 years' time, when everyone gets their hands on a smart phone and everyone has access to healthcare, telecommunications, just normal things that we're used to in the West, what a powerful force that is in terms of productivity and consumer demand.

That's the overall picture. That's the basis of our investments in Asia. If we look at what we have in the Asia Fund as well, as I guess also in the other funds, most of the exposure is linked to the rising middle class in Asia. The big markets, of course, are China and India.

What I've noticed is that in the last year and a half, the media's coverage of China actually has improved a bit. There's always this concern about it as a rising superpower. That's sort of getting increasing airplay, but one and a half years ago there was a perpetual concern about a financial collapse of the place. That seems to have subsided.

I think the reason why that's happening is just because the country is growing again. They've undertaken some reforms, which have actually reduced the big risks that the banking system used to have. Once that's out of the way, then the focus, you know, if one is positive on China, is on what are they doing in order to take the next step to turn into a developed country.

People used to be worried about a few things, properties, ghost cities in China, empty apartments, but actually a lot of the apartments have been filled up. This is the country with migration into the cities of about 20 million people a year.

China's recovering, and with all those and other problems sort of disappearing from our rear view mirror, we are seeing a country which is growing at 6.5 per cent and is investing in the right stuff. That's infrastructure, and again, sometimes it gets criticised for that, but it's a big country with a need for such things. And also education. An example of that is, if you go to some of these big cities in China, like Shenzhen, which is next to Hong Kong, it's a city of more than 10 million people. When I was a kid, it was a backwater and now it's a metropolis.

A lot of the tech companies are based there from China. These companies, the thing they have is, if they want to hire cheap engineers, they have unparalleled access to that. China produces about 4 million scientists and engineers from its universities every year. So that's enabling them to climb the technological ladder. The theme for China is really, because of their ability to adopt technology, and also adopt it in scale, it's actually making quite substantial leaps in terms of productivity.

Tony Kaye: So you're looking basically, for companies up there that are positioned for what's happening now, but also for the future?

Joseph Lai: We're really looking forward, and I guess the thinking is, what drives income, capital or income growth? It is productivity, and what drives productivity? It is education and technology, and having the right social structure in place so people can carry their life without too much interference. From an investment perspective, it is about finding companies which will benefit as they become the national champions of China, become the biggest insurance company in China, become the biggest brand in China. It is linked to the middle class, I think that is the overall theme.

Tony Kaye: So what are some of the key investment areas you're looking at in China?

Joseph Lai: How we think about it is, what are the Chinese people going to want to consume? The answer is actually whatever people in the West like to consume. However, there's already things they're consuming more than the Americans or the Europeans. If you look at automobiles, the car market in China is already 50 per cent bigger than the US or Europe. The area which is interesting is things like insurance, life insurance in particular, because the penetration of life insurance in China, in general, is way below that of Hong Kong, South Korea or Taiwan. As people got richer, they will actually want to protect their lives. I guess they feel their lives are worth protecting, in a way.

We've got some interesting companies, one of them is called Ping An Insurance, and that basically is a private insurer in China. The stuff they're doing is quite amazing, because in the last few years they've invested billions of dollars into financial technology, fintech. So much so that people can launch claims on a smart phone when they have a car accident, for instance. They can take a picture of the damage in the car, and then artificial intelligence from the company can work out what's the damage and the cost of repair.

Tony Kaye: That is cutting edge, for sure. What are some of other areas you're investing into?

Joseph Lai: I guess another area is healthcare. That's sort of an under-penetrated area, and we're seeing some of these Chinese drug companies making very interesting inroads into drugs. Some of them are actually top-selling drugs in western countries, yet in China they actually run quite low because medical isn't quite there. But that's actually changing rapidly. There's a strong desire for the country to look after its people more.

Tony Kaye: So what is your broader investment strategy, in terms of say, looking at a market such as China? Do you break it down by markets, or are you breaking it down by sectors and then looking across different markets and going “okay, that's going to be an opportunity within the region?”

Joseph Lai: Yeah, I guess typically, when we buy stocks in this part of the world, we are looking for long-term growth. In other words, will this business be a bigger business in three or five years' time. That's quite important, because when we buy shares we are investing in businesses, and I guess the implication of that is that we tend to buy stocks from companies which have long-term growth. Those sectors are, as we mentioned, maybe healthcare, maybe insurance, maybe the internet area, maybe it's just a fashion brand, a sports goods brand. The reason for that is we think there is a degree of nationalism there, and they do have their own brand that's unique in a Chinese sports brand as opposed to a Nike or an Adidas.

So most of the exposures there are, I think, related to this long-term growth story. There are themes there, such as cleaning up the environment. There's natural gas, or the transportation companies, or waste management companies, because they need a lot of that, and they're actually still investing. And that's actually where a lot of the investment's going, in actually cleaning up the environment.

Tony Kaye: Are you looking at value positions? Do you look for a stock that still hasn't really hit its straps fully, and is really more at an early stage?

Joseph Lai: Yes, we tend to want to look for things which are out of favour. Things which people may not have realised or just disliked for whatever reason, and try to look very carefully where the people are missing something. Because it's mainly in some situations we can find a valuation that we like. I guess the ideal scenario is a good company trading on a valuation which makes it a good stock to buy.

Tony Kaye: So, what's in your stocks portfolio at this stage?

Joseph Lai: So, if you look at the portfolio, what we have is basically a series of opportunities, some of them are just recently discovered by us, so maybe they're cheap. If we're right, the market recognises it and the valuation gets sort of closer to what we believe the intrinsic value is. It's a constant process of comparing what we have in the portfolio to what we can find in terms of our opportunities set. By that it has to be necessarily subjective, because when something's gone up, is it still going to be good? Is it going to deliver returns to our clients? It is subjective. But a lot of the input for such activity comes from the inside and the work we do, and I guess the experience in investing in the region for quite so long that helps us to assess the relative merits of each opportunity.

Tony Kaye: So, with Ping An Insurance for example, is that a position with good upside from where it is now?

Joseph Lai: Yeah, their stock's actually gone up quite a lot since last year, but it's still valued at close to the GFC level. With China recovering, it's actually doing one of those things that people are sort of not focused on. So, it's still cheap, but if you look at the chart you go, it's gone up quite a bit actually.

Tony Kaye: Yeah, and do you buy in local currency? Do you hedge or unhedge?

Joseph Lai: Most of it is unhedged, so we are exposed to the earnings in local currencies in most cases where we can hedge when we believe there's some potential dislocation in currency. We sort of did that a few years ago when there was a bit of a concern about the currency of China, their RMB evaluation. The thinking there is, if we're exposed to the RMB earnings, we want an edge against it if there is a bit of a devaluation, which of course, didn't really happen.

Tony Kaye: It's gotten quite stronger by now.

Joseph Lai: It's going strong, yes, partly because of the weak US dollar. I think the thing is, domestically, people are a lot more positive about what's going on there, which is actually a big change from four years ago when the locals were not sure. But they're doing quite a few good things, so partly because of that there's appetite to invest and they're not as keen to want to diversify their money offshore.

Tony Kaye: Do you think the inclusion of China A shares into the MSCI Emerging Markets and World Index is positive in general, because there's only a relatively small number of stocks in there, isn't there?

Joseph Lai: If we look at the MSCI, the investment market index, they carry only a small percentage of China stocks. The understanding is the percentage proportion is going to increase in the next five, 10 years. It all of a sudden makes sense for fund managers to start hiring people at the top to go “we should have people look at this market because it's actually going to increase in size.” And this is, by the way, the second biggest economy on Earth. If not for anything, it's important to know what's going on so it helps understanding of the other positions maybe outside of China.

Tony Kaye: Yes, it will be interesting. It's such a huge market, the Chinese market.

Joseph Lai: Yeah, it's, I think, 9, or maybe more, trillion US dollars. Increasingly we are seeing more ways to access that market; you can access it through Hong Kong these days. I think a lot of global funds are starting to look at it again. Before 2010, China was a place which a lot of the global funds wanted exposure to, and it was the juggernaut that was never going to stop. But, of course, it had to go through six, seven years of adjustment. And now what we're seeing is actually, global funds are starting to invest into the Chinese market after being absent for quite a long time. They're also seeing that as opportunity in the next few years.

Tony Kaye: Thanks again for your time Joseph.

Joseph Lai: Thank you.