Asian companies founder in low-return rut as cash piles crimp growth
23/06/2016 06:40
* Asia firms' cash assets at two-decade high on slow global
growth
* ROEs may slip from 14-year lows, Asia risks staying
underweight
* Consolidation under way but overcapacity may persist for
years
By Nichola Saminather
SINGAPORE, June 23 (Reuters) - Asian stock investors hoping
for respite from five years of falling returns may have to wait
longer yet as companies are hoarding cash rather than investing
due to poor global growth.
The average return-on-equity across Asia ex-Japan - hovering
near 14-year lows of around 10.5 percent - will likely slip
further with the risk that investors will maintain their
underweight positions for the region for some time.
"The underlying problem is that companies are not investing,
because of lack of opportunities, uncertainty about the outlook
for growth," said Herald van der Linde, head of Asia-Pacific
equity strategy at HSBC in Hong Kong.
Profit margins have risen to their highest since 2011, but
largely due to cost-cutting and consolidation, not growth.
Asia ex-Japan stocks have fallen almost 16 percent in the
past year with prices at 1.3 times book value, near their lowest
since the global financial crisis. That compares with a 7
percent drop in the MSCI World index, whose price-to-book ratio
is 2.1 percent.
About 18.4 percent of Asia ex-Japan companies' total assets
was in cash and short-term investments, the highest since at
least 1994, an analysis of over 600 Asia ex-Japan companies by
HSBC showed. Fixed asset investment fell to 36.2 percent of
total assets, the lowest over the same period.
Weak global growth has kept the lid on corporate
investments. The World Bank recently cut its 2016 global growth
forecast to 2.4 percent from 2.9 percent estimated in January,
while the Asian Development Bank also reduced its emerging Asia
growth forecast to 5.7 percent from 6 percent in December.
"There are certain areas where valuations, whilst low, are
simply matching the low-return environment," said Ian Tabberer,
who manages global equities for Henderson Global Investors in
London, and is underweight Asia-Pacific equities.
Ironically, interest rates at multi-year lows across the
region aimed at supporting growth have become part of the
problem by keeping unviable businesses alive, contributing to
overcapacity.
While lower rates "had the initial effect of stabilising
markets, they've moved into a period where they're starting to
harm the underlying economies," said Mark Wills, head of State
Street Global Advisors' investment solutions group in Sydney.
There has been some consolidation among Chinese railway
equipment makers and retailers and Taiwanese and South Korean
chip makers, but excess capacity could take years to resolve.
"So you get overcapacity, lack of investment, lack of
employment and lack of demand. This is a cycle you're stuck into
and this period of lower growth might well continue for some
time," said HSBC's van der Linde.
BULGING CASH RESERVES
Companies with bloated cash piles typically make investors
nervous as they are not investing to aid growth or boost
returns.
Alibaba Pictures 1060.HK , the media arm of Chinese
e-commerce company Alibaba Group BABA.N , had almost 63 percent
of its assets in cash as of Dec. 31, HSBC said.
The figure was 50 percent for Hong Kong-based Power Assets
0006.HK , after it sold down its stake in Hong Kong Electric
Co. last year. urn:newsml:reuters.com:*:nL3N0YV2ZN
Both companies said in e-mailed statements that their cash
reserves gave them the flexibility to pursue any opportunities
that might arise, but did not comment on whether there were many
opportunities in the current economic climate.
Other regional companies with cash piles include Samsung
Electronics 005930.KS , Infosys INFY.NS and Tata Consultancy
Services TCS.NS , where cash and short-term investments
accounted for between 30 percent and 43 percent of total assets
as of March 31, according Thomson Reuters data.
The obvious solutions to excess cash are to boost dividends
or buy back shares.
"If a company cannot find attractive investment
opportunities, they should return that cash to shareholders,"
said Matthew Vaight, global emerging markets portfolio manager
at M&G Investments in London, adding that Asian companies tended
to pay less dividends than companies in developed markets.
Investors said that for companies to invest for future
growth, things might have to get worse before they get better.
"The market can't tolerate the destruction of capital for
significant periods of time," Henderson's Tabberer said. "That
acts as a catalyst for change, leading management teams and
industries to take action, such as consolidation in certain
sectors, increased mergers and acquisitions. But it takes time."
(Editing by Nachum Kaplan and Jacqueline Wong)
((Nichola.Saminather@thomsonreuters.com; +65 6870 3317; Reuters
Messaging: nichola.saminather.thomsonreuters@reuters.net))
Keywords: ASIA STOCKS/RETURNS