Those ups and downs are reflected in the average historical yields from
Asia Pacific equity funds – while the average annual compounded rate of
return from the category for the 10-year period through Feb. 28, 2017, was
a mere 2.6%, the 5-year average was a more heartening 9.0%, and returns for
the year through February ran to a very healthy 16.1%.
“On a forward price/earnings basis, the valuation of the Asian equity
market is currently in line with its historical average, having spent much
of 2016 trading below these levels,” says Lam. “Earnings revisions have
turned positive, but for markets to sustain their progress, earnings growth
in the low teens may need to be sustained,” he added.
Lam goes on to say, “This is not unreasonable given the current cyclical
upturn, but it may prove a stretch if political agendas lead to significant
one of Asia’s attractions remains its valuation discount to other
equity markets, and it does not seem that political or economic risks
are substantially higher.”
Nevertheless, Lam admits that such risks continue to exist, and will likely
forestall strong and sustained growth in the region. “Asian economic growth
is likely to remain anemic by its own historical standards,” he says.
“Export growth has started to show signs of improvement, but we do not
expect a strong and durable recovery given continued uncertainty in global
demand. A shift in U.S. trade policy under Donald Trump is also a risk,
although we anticipate the president’s rhetoric will be diluted by the
necessity for pragmatism.
“China’s economy is showing signs of stabilization, but this improvement
has been accompanied by continued high levels of credit growth,” Lam adds.
“Their financial system does not yet appear to be vulnerable to the kind of
uncontrolled liquidity shock that has afflicted some emerging economies
late in their credit cycle, but China’s corporate debt overhang will need
to be addressed eventually.”
Accordingly, Lam intends to continue with the fund’s strategy of choosing
stocks carefully, while simultaneously keeping a close eye on the macro
environment. This dual focus has enabled the Invesco Indo-Pacific Fund to
handily outperform its peer group, with returns of 25.9% for the year
through the end of February, 11.7% over 5 years, and 4.9% over 10 years
(not scintillating, but still almost double the category average).
That kind of performance has resulted in three annual
FundGrade A+™ Awards
in 2013, 2014, and 2015, and a current FundGrade™
monthly A-Grade rating for February.
“The big driver in our performance has been stock selection in the IT,
consumer discretionary, and materials sectors, as well as in China and
South Korea,” says Lam. “We take an active and flexible approach that
combines both top-down and bottom-up analyses, beginning with an analysis
of liquidity conditions, the key determinant in shaping the environment for
“We look for companies with good quality management teams and undervalued
future earnings streams,” Lam says, citing NetEase Inc., a Chinese Internet
technology firm, as an ideal target. “NetEase is a great example of a
contrarian purchase,” he says. “In our opinion, they are China’s best
online game developer. We had been following it since 2009 and believed the
company could grow earnings at around 15% a year, and that a fair
price/earnings multiple for that growth would be at least 15 times.
“At the time, there had been a lot of news about fraud at U.S.-listed
Chinese companies, so all Chinese companies with U.S. listings got sold
down heavily, including good ones like NetEase, whose shares were trading
at just 10 times earnings,” Lam adds. “When we bought in 2012, our expected
annual return was over 20% per annum, and as it turned out, earnings growth
has been better than expected, as has share price performance.”
is an experienced financial and business journalist and a frequent
contributor to the Fund Library.
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