Developed Asia: 5 burning questions

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Developed Asian equities make up roughly 12 per cent of the Managed Fund portfolio. Developed Asia investment manager, Iain Campbell, explains why he’s excited about the region.

01. What do we mean by Developed Asia and what’s the case for investing there?

Developed Asia comprises Asian countries and territories that, by virtue of their economic status, are classified as ‘developed’ rather than ‘emerging’ or ‘frontier’. It includes Japan, Australia, Hong Kong, Singapore and New Zealand. Its attraction lies in the proximity of its companies to dynamic Asian markets together with developed-world standards of corporate governance, rule of law and educated workforce.

It’s a region prone to stereotypes. Glancing at stock market indices, you’d be forgiven for assuming that Japan is all about traditional conglomerates and auto companies, or that Australia is about mining and banking. But when you dig further, you can find overlooked opportunities. For example, who gives hearing implants a second thought? But Cochlear, an Australian hearing implant innovator, has over 70 per cent market share and has outcompeted its US and European rivals for years. It’s a relatively small and niche company, but we’ve held shares in Cochlear for over a decade.

Beyond Australia and New Zealand, there’s Hong Kong and Singapore. These territories are gateways to the fast-growing economies of China and Southeast Asia, giving companies there a wealth of opportunities. And finally there’s Japan, the largest part of the Developed Asia region.

02. You tend to hear about Japan’s lost decade and economic stagnation. What does that mean for a stock picker like you?

The Japanese economy has had its issues, but for investors like us who follow a bottom-up approach, the economic growth of the country where a company is headquartered is less important. There are plenty of dynamic Japanese companies with ambitious management teams that have actively sought growth opportunities for their products and services.

Some of these companies may have been ignored because they operate in segments that are considered dull. Take Unicharm. It makes nappies and other absorbent goods, a low-growth market in Japan. However, it has steered its business towards opportunities such as pet care, elderly care and rapidly growing Asian markets such as India, Indonesia, Thailand and Vietnam, where it’s one of the top brands in its segment.

Some people associate Baillie Gifford with hi-tech disruptors like Tesla, Moderna and Shopify. Although we own these names in the US portion of the Managed Fund, regional equity managers like me play to our region’s strengths. I see great opportunities in companies like Nippon Paint. It moved beyond its home market decades ago, is the largest decorative paint company in China, Malaysia and Singapore, and is expanding into other emerging markets. It may soon add Indonesia to the list of countries it dominates.

While Unicharm and Nippon Paint’s products have been around for years, capable management teams have successfully taken their offerings overseas while maintaining quality and a focus on profitability. I believe these types of business will be key to generating attractive long-term returns.

03. AI is on everyone’s mind. How do you think about the AI opportunity in Developed Asia?

As in all new areas of opportunity, we want to ensure we invest in companies with strong fundamentals and competitive positions. We’re therefore cautious about investing in companies just because they’re AI-related.

That said, AI will be a big tailwind for certain firms. Japan’s reputation for technology, research and development has led to clusters of globally competitive businesses in areas such as factory automation and semiconductor production equipment. In the latter category, we’ve held SMC for many years and more recently we’ve bought Tokyo Electron. These companies are unlikely to produce the next ChatGPT-style product, but they are ‘picks and shovels’ businesses that will benefit from AI-driven demand for greater computing power globally.

04. Covid is back in the headlines, but the pandemic felt like it lasted a lot longer in Asia than in the UK. What are some of the impacts you’ve felt in Developed Asia?

We are over the worst of Covid, but we are not yet over its impact on the businesses in our portfolio. The effect of lockdowns on supply chains and consumer demand is apparent. In particular, the Chinese economy has taken longer to recover than expected. Covid disruptions led to inventory build-ups as companies anticipated demand booms in several industries and took a cautious approach to raw materials. Returning supply chains to normal has been painful for several holdings. A second feature of this period has been a slow recovery in demand among middle-class Asian consumers, which has negatively affected short-term performance.

But, as always, we see the opportunity. We have been taking advantage of recent share price weaknesses to add to great long-term growth businesses. Shiseido is one example. It sells luxury make up and skincare in department stores, airports and, increasingly, online. It suffered from a pandemic-related decline in Chinese consumption, but in the long term we think demand for its products will grow. We believe cosmetics is an area where brands and pricing power will remain strong. Elsewhere, Covid-related disruption and rising costs caused a temporary fall in profits at Nippon Paint. This allowed us to buy a high-quality business at an attractive valuation.

05. Finally, what excites you about Developed Asia right now?

There are big opportunities out there if you’re willing look. We like to take or add to holdings we feel are less appreciated by the market. Currently, there’s a chance to buy into many great growth franchises at what we consider bargain prices.

Cosmos Pharma is an excellent example. This Japanese high-street drugstore is facing near-term pain related to post-Covid economic conditions and fluctuations in Japanese currency, and its share price has fallen as a result. But it has a five-to-ten-year growth outlook and is a fundamentally attractive business run by experienced management with an ownership stake. It might not sound that exciting, but we look for companies with strong management, culture, product and brand that have the ability and ambition to grow shareholder value for years. Buying and holding great businesses is key to generating long-term capital growth for our clients.

Important Information and Risk factors

The manager believes an appropriate comparison for this Fund is the Investment Association Mixed Investment 40-85% Shares Sector median given the investment policy of the Fund and the approach taken by the manager when investing.

Past performance is not a guide to future returns.

The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in January 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

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Custody of assets, particularly in emerging markets, involves a risk of loss if a custodian becomes insolvent or breaches duties of care.

The Fund invests in emerging markets where difficulties in trading could arise, resulting in a negative impact on the value of your investment.

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