Jonathan Pines, Hermes Asia ex-Japan Equity Portfolio Manager at Hermes Investment Management, looks at driving forces behind the winners and losers of 2017 and what will likely drive performance in the year ahead.
Last year was a strong one for our MSCI Asia ex Japan benchmark, which rose 40%. Despite this strength, its longer term performance lags most other global indices (as well as medium term earnings and net asset growth) and we consider it to remain attractively priced.
What worked – and what didn’t for – for Asia ex-Japan stock pickers over the last year
For many years, we have identified stable-earnings, dividend-paying quality companies as generally overvalued, because yield-starved investors chose them in preference to bonds offering miserly rates of interest, while paying inadequate attention to equity risk when valuing these types of companies. In the last year, these types of quality companies got so crushed on a relative basis that many former high-flying income funds are now underperforming – even on a three-year basis. Indeed, half of the 10 worst-performing Asia Pacific ex-Japan Funds in 2017 have the words ‘income’ or ‘yield’ in their name. We believe that all narrowly focused, thematic and smart beta investment strategies will eventually suffer periods of underperformance – and should an adherent to such strategies outperform over the long-term, this would be purely fortuitous, with the strategy having had at least as great a chance of long-term underperformance.