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Special Report: Asia’s Honor Roll offers Opportunity for Straight-A Local Investing

By Chris Hall May 23, 2019

As Asian opportunities open up, advisors should be able to support even the most adventurous of clients. This is Part Four of a five-part special report on Investing in Asia.

In a globalized world, even the most domestically-focused investor is likely to have some overseas exposure. The Asian arms of American firms have brought back handsome returns for investors, but as a serendipitous by-product rather than a conscious investment strategy.

“When 39% of revenues generated by S&P 500 stocks are international, you’re getting exposure whether you want it or not,” says Anthony Saglimbene, global market strategist at Ameriprise.

But Asia is changing fast. “There is an increasing home-country bias in favor of local brands in Asia,” says David Dali, portfolio strategist at Matthews Asia.

With Amazon admitting defeat to Alibaba in China, and Starbucks being overtaken by another home-grown rival, Luckin Coffee, wealth clients may favor a more proactive approach to optimizing Asian opportunities. Additionally, many international companies are reappraising their supply chains, diversifying their manufacturing and logistics operations across southeast Asia and the Indian subcontinent, while domestic firms are proving their mettle in the consumer space.

These shifts can be good news for U.S. investors, if they are nimble. Both the Asian entities that are facilitating supply-chain reengineering and the U.S. enterprises taking advantage of it may represent sound long-term investments. But many of Asia’s consumer-facing and technology-led firms are now listing in the U.S., potentially making it easier for investors to gain exposure.

“U.S. investors focus on three main issues when assessing China-into-U.S. IPOs: business model; financial profile; and corporate governance.”
John Lee
UBS
Chinese firms have beaten a path to the U.S. since Alibaba launched the world’s largest IPO on the New York Stock Exchange in 2014. More than 150 Chinese firms are listed on the U.S.’s three largest exchanges, with a combined market capitalization of $1.2 trillion. Almost 30 China-to-U.S. IPOs have raised a total of $10 billion already in 2019 and the pipeline – including Luckin – remains busy.

According to John Lee, vice chairman, Asia for corporate client solutions at UBS, the attraction is mutual. “U.S. investors focus on three main issues when assessing China-into-U.S. IPOs: business model; financial profile; and corporate governance. They’re looking for firms that have similar attributes to their existing investments, but which can deliver higher returns,” he explains. “Chinese firms have been attracted to the U.S. by a large, diverse and specialized investor base, as well as the greater flexibility of listing rules, compared with current dual-class share requirements in Hong Kong.”

Most China-into-U.S. IPOs are issued as American Depository Receipts (ADRs), usually but not always derived from underlying shares listed on a local exchange. According to Lee, some Chinese firms prefer to list in the U.S. ahead of a future domestic listing. Although there are different classes of ADRs – with varying disclosure requirements – all are U.S. denominated. But it’s worth noting that dividends payable to holders can be subject to currency risk and withholding tax. Liquidity is typically supported by a sponsoring U.S. broker. "China-into-U.S. IPOs typically reserve 10-20% of an issue for retail investors, depending on overall investor mix and nature of the issuer," adds Lee.

Clients interested in individual stock investments at the upper end of the spectrum are also exploring Asian exposure via hedge funds and private capital opportunities. Nine of the ten biggest private equity and venture capital deals of 2018 were for companies based in Asia, according to financial data provider Preqin.

Yegin Chen, senior global alternative investment strategist at Wells Fargo, says private capital funds can access a broader selection of companies in industries benefitting from Asia’s consumer growth story, including discretionary goods, finance services, healthcare and education. “As well as this wider selection set, investing in private capital can typically yield more attractive valuations before a company goes public, and the opportunity to influence governance via board-level representation by a private capital fund, which can support superior performance versus listed firms,” he says.

Chen says private capital firms are actively seeking out companies and assets in both developed and emerging Asian countries, noting the latter represent acceptable risks due to increasing global integration. “Further, the longer-term horizons and expertise of private capital funds can help to mitigate concerns of U.S. investors around governance, transparency and short-term volatility,” he says.

For the best client experience, Chen recommends private capital funds that combine ‘on-the-ground’ expertise and relationships with domestic U.S. levels of quality of service. “This means having a team based in Asia connected to a U.S.-based general partner, delivering U.S. standards of reporting, accounting and risk management, and transacting capital calls and providing reporting in U.S. dollars,” he says.

Next: Indices are Evolving on Asia; Are You?