Alquity’s head of Asian investments, Mike Sell, specialises in Asia’s developing economies. Here he scrutinises the macro and micro on trips to the Philippines and Indonesia and returns to London with a very different impression of each.
We believe a key part of any investment process should be to regularly meet the management of companies we invest in, or are considering investing in.
This is particularly the case when your aim is to steal a lead on peers by hunting for the ‘next idea’. For this reason, we place very little reliance on sell-side brokerage firms, which tend to focus on the same old names, and instead undertake the majority of our research in-house.
We also engage with companies in our London offices both face-to-face and over the phone, but there is no substitute for observing the company in its own environment, which could include its offices, factory, as well as where its products are sold. The old adage is certainly true – seeing is believing.
With this in mind, Alquity’s team Asia – myself and Aaron Armstrong – travelled to Indonesia and the Philippines earlier this summer.
Our goal was to meet with companies we are invested in, seek out new opportunities, and also to gauge the overall economic outlook – should we be concerned about the Philippines ahead of next year’s elections, and is Indonesia’s President Jokowi really a reformer?
After a delayed journey due to bad weather in Hong Kong, we finally arrived in Jakarta. We managed to pass through the airport in 10 minutes, helped by our strategy of only carrying hand luggage. A quick trip to Bloc M Plaza – a large downtown shopping centre – on Sunday afternoon revealed a busy atmosphere.
Matahari – a relatively low-end department store, and one of our key holdings – seemed particularly popular, with queues at the tills on several of the five floors confirming the attraction of its value-for-money proposition.
Many of our meetings the following day revolved around the construction sector, which will benefit from the infrastructure improvements that Indonesia so badly needs.
However, not all the companies met our strict criteria on environmental, social and governance (ESG) issues, and while we did find two relatively undiscovered potential investments, our meetings revealed deep concerns about stagnation in the economy, rather than growth, and worries about government intervention.
These issues were increasingly apparent with the four banks that we met. Government interference with free market pricing is a concern from a macroeconomic perspective and results in deteriorating visibility and transparency of earnings for the companies involved. Banks suffer directly and indirectly from this, but also from rising bad debts – a toxic mix. As a result we sold out of the sector – which has worked out well.
Focused on the Philippines
So, after 17 meetings in Jakarta, on to the Philippines, and a long queue at immigration and nightmare traffic. Not an auspicious start.
However, this was quickly allayed by a reaffirmation of the high quality nature of the companies. Bank BDO’s focus on ESG factors was a positive surprise, as was its long-term growth outlook. This latter point was a recurring theme with companies in all sectors, providing a stark contrast to Indonesia.
We also arranged to visit a number of supermarkets to meet the store managers, rather than those from the corporate office. This enables us to gain a very different perspective from most other investors, and has reinforced our conviction in Puregold, a supermarket chain, which benefits from our long-term investment themes of urbanisation and demographics.
Not everything in the garden is rosy however. Our concerns on the wider outlook for this consumer staples company were magnified rather than diminished, with the emergence of medium-term structural issues.
In contrast we became very excited about air conditioning company Concepcion Industries, as air conditioning penetration is only 7% versus 53% in China and 72% in Singapore.
As urbanisation continues and household incomes rise, growth is only going one way – up. We were also bowled over by the management’s focus on minority shareholders. Following additional analysis back in London, we have now added this to the portfolio
Overall, two very different countries and two very different outlooks. President Jokowi is clearly not Modi, which the market has not yet fully appreciated, and we have serious concerns about the overall outlook for Indonesia. In contrast, we came away greatly reassured about the Philippines, and took home some excellent new ideas.
This article originally appeared in the October issue of Citywire Global magazine