Asia: Region of Opportunities

HONG KONG,Dec. 15,2022 -- In an interview with Marco Klaus,Silverhorn'sChief Investment Officer,Marco explains his view on public and private markets in anticipation of Silverhorn's annual outlook on Asia,the region of opportunities.

The return of sanity and fundamental values

In recent years,there have been many market events that only a cynic could have predicted. We saw the incredible rise in FAANG shares,and we witnessed a more than questionable boom in SPACs,culminating in Nikola reaching a market cap of USD34 billion in June 2020 - a company with zero revenue and a prototype electric vehicle that did not work.

There are many reasons why this was able to happen,but the key factor was undoubtedly the fact that capital was essentially free and widely available over the past few years. As a result,there was a liquidity-driven market where "old school" fundamentals such as a solid balance sheet and positive cash flow did not play a big role.

This has changed as central banks - led by the US Federal Reserve - have reduced liquidity,at least temporarily,in response to high consumer price inflation. This presents opportunities that Silverhorn as a fundamentally oriented asset manager can maximise.

What this means as an asset manager

First,this means that we look at the attractiveness of countries,asset classes,and companies,and spend our time and resources accordingly. Second,there have been isolated periods of exuberance in Asia as well (e.g.,Chinese real estate or certain areas of the Asian VC industry),though overall much smaller compared to Western markets. However,the impact of these burst bubbles and the Federal Reserve's contractionarymonetary policy has also been felt strongly in Asia,so many Asian assets that were not expensive to begin with are now decidedly cheap.

Where we see the best return opportunities in Asia

We forecast Chinese equities among the winners for the coming year,specifically companies whose valuations have suffered greatly from the zero-COVID strategy and that could gain market share because of their economic position.

Such companies can be found in diverse sectors such as consumer goods and real estate. Longer term,we expect attractive returns for China's "small giants" - the small and medium-sized companies that are deemed nationally advantaged by the government,as well as companies working in strategic "deep tech" areas such as AI,5G,quantum computing,biotechnology,aerospace,and clean energy,to name a few.

We believe the return outlook is also good for investment grade bonds. The valuation of the regional index is more attractive than it has been in a decade. In addition,investors are receiving higher compensation for default risk than for comparable paper in the US.

However,investors should be well informed about the quality of the underlying portfolio. Large outflows and a lack of liquidity have led to many funds still carrying legacy assets. In private markets,we see attractive investment opportunities in India and Southeast Asia,among others.

We see the opportunity primarily in young companies moving from the "start-up" to the "scale-up" phase in venture capital.

What else we consider

In a world of increasing uncertainty,multi-asset investing is an attractive proposition. The ability to invest in multiple asset classes means investors can diversify their funds to mitigate risk and market volatility.

At Silverhorn,we prefer to work with sub-portfolios rather than asset classes to address the problem of increasing correlation between asset classes during periods of stress.

How we navigate the volatile environment in China

We have been investing in China for a long time and know how to deal with volatility. We apply a systematic investment framework that guides our risk positioning and work with specialists who can systematically analyse and classify what is happening on the ground.

China offers far more investment opportunities than stocks and bonds. The market is huge,liquid,and complex. As a result,there are various structural inefficiencies that can be skimmed by arbitrage strategies (e.g.,arbitrage of stocks listed in both Mainland China and Hong Kong). Such strategies work well in a volatile market environment and help us construct more stable portfolios.

The most important lessons we've learned over the past twelve years

We drive a multi-asset,multi-manager approach. Our experience has shown that this is the best way to generate sustainable long-term returns in a dynamic environment. Our investment framework is based on a dynamic allocation of risk capital across four sub-portfolios.

We select specialists in traditional and alternative asset classes to express our beliefs in the sub-portfolios. Being on the ground helps us not only in the due diligence process,but also in monitoring managers. Where the investment mandate allows,we also invest in private equity and private debt.

My experience has shown that Asia is anything but a homogeneous and efficient market. Accordingly,it is crucial to understand local conditions in detail and to work with specialists.

In addition,I've learned that markets can collapse rapidly and take years to recover. For example,the Chinese stock market took ten years to reach pre-global financial crisis levels. Accordingly,we spend plenty of time constructing robust portfolios to enhance long-term return opportunities.

To read Silverhorn's 2023 Annual Outlook Report,click here.