Asian companies founder in low-return rut as cash piles crimp growth

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Singapore | Published: June 23, 2016 11:50:15 AM

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 World Bank recently cut its 2016 global growth forecast to 2.4 percent from 2.9 percent estimated in January. (Reuters)The World Bank recently cut its 2016 global growth forecast to 2.4 percent from 2.9 percent estimated in January. (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, the media arm of Chinese e-commerce company Alibaba Group, 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 , after it sold down its stake in Hong Kong Electric Co. last year.

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, Infosys and Tata Consultancy Services, 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.”

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