Asia can look forward to another tough year: Hugh Young, Aberdeen AMC

In an interview with ET’s Biswajit Baruah, Hugh Young, managing director, Aberdeen Asset Management, says sentiment towards emerging markets hasn’t been this bad in ages and that China has replaced the Federal Reserve as the biggest concern for many investors around the world. Edited excerpts

ET: What is your stock investment strategy in these volatile times?

Hugh Young: Our contrarian instincts tell us that volatility and opportunity often go hand-in-hand. That’s why our fund managers are starting to get excited again. Those of us who have been around a while have seen this all before and we know that Asia will pull through and emerge even stronger.

ET: Are you finding opportunities after the recent markets correction?

Hugh Young: There are pockets of growth in Asia despite the tough conditions. For example, we have been keeping a close eye on selected companies operating in China’s tourism, healthcare and insurance industries, while India’s private sector banks continue to do well when measured against a range of performance indicators. Elsewhere, some Asian companies are paying out more in dividends to their shareholders, while some have enhanced shareholder returns with share buybacks funded from deep cash reserves.

ET:How are emerging markets expected to perform this year?

Hugh Young: Asia can look forward to another tough year. Global demand for goods and services is unlikely to improve anytime soon. Investor sentiment towards emerging markets hasn’t been this bad in ages.

ET: What is your economic outlook on China?

Hugh Young: China has replaced the Federal Reserve as their biggest concern for many investors around the world. The economy is slowing – that’s not in dispute. Our latest forecast for GDP growth this year is 6.6 per cent, a far cry from China’s double-digit expansion of yesteryear, and it may slow even further. Slower growth is as much by design as by accident, as the economy moves away from an investment-led, export-driven model towards one in which domestic consumption plays the dominant role. The country wants growth that is sustainable.

ET: How will the China slowdown impact other emerging market countries?

Hugh Young:: That’s not to say China doesn’t face considerable challenges. Local government and corporate debt are big problems, the state sector is bloated and inefficient, while the property market remains fragile. Beijing still has plenty of tools to avert catastrophes. The country’s slowdown has definitely been hard on commodity suppliers in the region such as Malaysia and Indonesia. Asian countries linked to China by production chains also suffer.

ET: How serious is the Chinese equity market crisis?

Hugh Young: Chinese equity markets are divorced from reality. When share prices are driven by the interaction between state-sponsored market manipulation and the speculative instincts of millions of retail investors, they cease to serve as a gauge of a company’s quality. Nor can they offer a glimpse into the health of an economy. That’s why the Shanghai and Shenzhen stock exchanges won’t tell you that while China needs to work through the effects of a massive misallocation of capital following the global financial crisis, the economy is nowhere near crashing.