Select your investor profile:
This content is only for the selected type of investor.
Individual investor?
Trip notes: Diamonds in the Rough
A recent investment trip to Malaysia proves to be more than just a pulse check on investment ideas as Gita Ramakrishnan stumbles on the 'Silicone Valley' of the East'.
Written by
Shifting sands
Malaysia has fallen off the radar for many emerging market investors as illustrated by the country weight falling from 33 percent at the inception of the MSCI EM Index in 1988 to 2.5 percent as of 20181. This has come on the back of unexciting, though stable, annualised real GDP (USD terms) growth of around 5 percent vs. world growth of 4 percent over that same period2.
Against that backdrop, investor expectations going into the recent general elections in May 2018 were muted - after all, having never lost a general election, the incumbent coalition party had comfortably been in power since the country's August 1957 independence. As such, the shock election results in favour of the opposition signalled a meaningful paradigm shift - with a wave of positive sentiment sweeping the country.
I had not expected my visit to Malaysia to be much more than a pulse check on current investment ideas but my trip in fact ended up being considerably more fruitful than anticipated. The confidence boost from a change in government seems to have tangibly energized the consumer. Spurred on by a temporary tax holiday on goods and services, spending accelerated across the hospitality and consumer discretionary goods sectors.
The confidence boost from a change in government seems to have tangibly energized the consumer
However meaningful change also brings some level of necessary pain and this is likely to hit fundamentals. The new government aims to tackle the surging budget deficit, which is linked to years of resource misallocation by the outgoing government and which is likely to take years to resolve.
While the populace seems happy to continue spending for now, investors and corporates remain largely hawkish, waiting for the dust to settle. Recent policy whispers appear fairly populist and years of supposed corruption leave any company with government related contracts open to the risk of scrutiny and governance investigations.
Exploring the Silicon Valley of the East
Although the post-election, on-the-ground feedback was valuable, the biggest finding from my trip involved a cluster of small to mid-sized technology companies in the state of Penang, recently dubbed the 'Silicone Valley of the East'. Penang is famous for its thriving food scene but exploring past the allure of the bustling food markets, I found myself in the middle of a burgeoning tech hardware hub.
Importantly, the state had been largely excluded from federal funding until now, as it had been governed by the then opposition party. The recent change of government could herald the start of significant infrastructure and state support for these fledgling industries, thereby creating an incremental positive driver in the sector.
Among the more interesting companies tucked inside the surprisingly lush Bayan Lepas industrial zone were ones focused on the Internet of Things (IoT) and visual testing for integrated circuit boards.
The applications for IoT based solutions are growing exponentially and should ensure an attractive earnings and cash flow cycle for some time to come. Many of these tech companies have developed intellectual property (IP) which creates meaningful barriers against competition and promotes further research and development, creating a powerful virtuous cycle.
Encouragingly, all the companies I met were entrepreneurial start ups, which have benefited from operating in a free trade zone. This has created a thriving information ecosystem. Additionally, being entrepreneur driven, many of these companies have robust dividend policies in place with payout ratios in excess of 50 percent. With healthy balance sheets (net cash), revenue growth of over 40 percent and returns on capital levels in the 30 percent area, these companies present the opportunity to invest in structural growth stories at attractive levels of returns.
The material drawback at present for most of these companies is the limited liquidity of the stock listings. However, as these companies mature and develop, the liquidity should increase substantially but unfortunately, so will the valuations.
To sum up, the trip to Malaysia yielded some exciting and many unexpected ideas. I believe we have been presented with the unique opportunity to build positions in stocks not yet fully understood by the wider market, much like buying raw diamonds before they shine.
More trip notes from our emerging equity team
Trip notes: Chasing Chinese Unicorns
James Kenney, Senior Investment Manager
August 2018
Trip notes: Postcard from Turkey
Christopher Bannon, Senior Investment Manager
June 2018
Trip notes: Indian explorer
Prashant Kothari, Senior Investment Manager
July 2018
Important legal information
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet.
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
EU countries: the relevant entity is Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg
Switzerland: the relevant entity is Pictet Asset Management SA , 60 Route des Acacias – 1211 Geneva 73
Hong Kong: this material has not been reviewed by the Securities and Futures Commission or any other regulatory authority. The issuer of this material is Pictet Asset Management (Hong Kong) Limited.
Singapore: this material is issued by Pictet Asset Management (Singapore) Pte Ltd. This material is intended only for institutional and accredited investors and it has not been reviewed by the Monetary Authority of Singapore.
For Australian investors, Pictet Asset Management Limited (ARBN 121 228 957) is exempt from the requirement to hold an Australian financial services license, under the Corporations Act 2001.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc. is registered as Portfolio Manager authorised to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.