Trends Watch: Asia and Alternatives
August 08, 2019
By Elana Margulies-Snyderman
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Jonathan Garrick, Portfolio Manager, Neutron Asia Absolute Return Fund, Bric Neutron Asset Management.
What is your outlook for alternatives?
In Asia, the interest level in alternative investments from family offices and wealth managers is undeniably increasing. A common theme sees investors rotating capital out of bonds, due to the historically low yields, with the intention of diversifying into a variety of alternatives. Given the current macro environment, this theme is only set to accelerate. On the hedge fund side, investors are seeking out focused, concentrated strategies or certain niche activity that is uncorrelated to the broader markets. Unfortunately, most of the funds that fit the bill are often regarded as too small as the landscape in Asia is increasingly dominated by a limited number of large multi-strategy funds. Instead, investors have rotated into private equity and real estate investments which have the capacity for capital and satisfy the need for diversification.
What is your outlook for the economy?
For Asia, the dominant issues at this time remain the U.S.-China trade negotiations, monetary policy and China domestic stimulus. There is no doubt that as the trade war becomes prolonged that it is taking a considerable toll and exerting downward pressure on the Chinese economy. The Trump Administration, despite the reported progress in the trade negotiations, continues to increase the pressure. As a result, Chinese economic data is not encouraging. Broadly, the GDP estimates have been lowered and earnings forecasts continue to come down. As we approach the half-year corporate reporting season, expectations are low and the likelihood is for further cuts. September is traditionally the busiest revision month although, with investor sentiment so low, some may start to focus on guidance and valuation. With regards to valuation, especially looking at trough price to book metrics, it could be argued that it is largely in the price. Furthermore, investor positioning remains light with global investors shunning China. Institutional weightings in emerging markets are the lowest since 2001 and within emerging markets, Asia ex-Japan is the biggest underweight. A near-term resolution to the U.S.-China trade negotiations remains improbable. Going forward, both economies will seek to cut reliance on each other which may weigh on the global economy. China is addressing the structural change of restricted export markets with stimulus targeted at domestic consumption. This will bring opportunities.
What keeps you up at night?
For us, regulation change is the main risk for our portfolio. Ordinarily, this has centered around China, where the government can rule by decree with little or no notice to investors or other stakeholders. Implementation can be immediate. These directives can affect all sectors at every level from pricing, taxes, restrictions on supply, and commercial operating criteria to even company-specific rulings. Consequently, it is far more favorable to align your interests with the government’s intentions than not. In more recent times, the United States government has begun to implement commercial directives that have a global impact. The most recent examples of this are the trade tariffs and rulings against ZTE and Huawei, which are hugely impactful to the whole technology supply chain and auxiliary businesses. This now seems to be the new world order and has created a more uncertain investment environment.
Corporate governance and behavior is always a concern in emerging markets. To address this, we use a forensic accounting and governance screening application. This draws the data from Bloomberg and produces four pages of statistics for comparison. Importantly, it provides a critical view of the company and its accounting policies highlighting the prominent data points. This saves considerable time and allows us to comprehensively analyze more companies and derive quicker conclusions.
Finally, I would have to mention liquidity has always been a concern. The only times we have really felt trapped was when a stock broke down and liquidity dried up. As a consequence, we closely monitor the liquidity of our positions.