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Asia equity investing: The contrarian advantage

Jun Oh, Equity Portfolio Manager
2022-08-31
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

Key points

We seek to invest where:

  • Stock prices are depressed due to weak business fundamentals or significant concerns about the company, industry, or country.
  • Investor sentiment is in the pessimism or apathy phase, where a lack of buying interest has driven a dislocation between the company’s share price and its intrinsic value.
  • We can identify positive changes in fundamentals over time that the market has ignored due to negative investor sentiment and a short-term focus.

We believe:

  • Economic cyclicality, currency fluctuation, and heightened investor behavioral biases result in a high level of volatility.
  • The Asian investment universe is wide, deep, and becoming more diverse through numerous IPOs.
  • The combination of a large universe and high volatility means there will always be areas of apathy and inefficiencies for our investment approach to exploit.
  • An early-cycle, reflationary environment with a market tilt toward value is a particularly compelling time to hold a contrarian strategy.

After a decade-long global equity bull market dominated by growth stocks, Jun Oh, manager of the Asia Advantage Equity Platform, believes Asia’s market dynamics, combined with a potentially reflationary environment, could make this a good time to be a contrarian in Asia. We sat down with him to find out why.

Q: What differentiates your style of investing?

Jun: My team and I believe that sentiment and stock prices are more volatile than a company’s intrinsic value and that the long-term prospects of a business are rarely as good or bad as they seem at sentiment extremes. So while, like many of our peers, we base our investment decisions on extensive industry research and bottom-up analysis, we also believe that fundamental research is only part of the equation. In our view, the analysis and understanding of investor psychology and sentiment is the other part. By using a disciplined, dispassionate framework, we aim to take advantage of sentiment-driven dislocations to generate attractive returns.

Q: What kind of opportunities are you looking for?

Jun: We aim to buy future earnings growth or appreciating assets at prices that are deeply discounted due to prevailing negative fundamentals and sentiment. In our view, when a company is going through a rough patch, the market tends to get anchored to recent negative trends and often underappreciates the positives, such as the company’s financial strength, management’s proven track record, or supportive secular growth trends. We look for opportunities where 1) current earnings are below potential, 2) expectations are low, 3) the share price is down meaningfully from recent highs, and 4) the valuation is cheap versus the stock’s history and its peers. A combination of earnings growth, beating expectations, and valuation rerating can lead to big winners.

We invest in a wide range of companies where we believe the issues weighing on the share price are short term, can be overcome, and mask a positive long-term outlook. We need to clearly understand the issues that are weighing on fundamentals and share prices. Then we invest in situations where we have a clear, differentiated thesis that both fundamentals and investor sentiment will improve in the future. We want to invest in companies with scarcity value — that is, they offer products or services that are differentiated and valuable.

We are not wedded to any particular type of company. Rather, our approach leads to a relatively balanced portfolio of companies exhibiting different characteristics across industries, business models, and phases of their life cycle. The common underlying theme in each case is our conviction in the company’s ability to turn the situation around and the identification of a catalyst to trigger this.

Q: Does this approach work in Asia’s growth markets?

Jun: There is a common misconception that only growth or momentum investment strategies can do well in Asia. In 2019 and 2020, growth dramatically outperformed. However, since 2010, growth and value have…

To read more, please click the download link below.

Authored by
jun oh
Jun Oh
Equity Portfolio Manager
Hong Kong

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