that he could buy, forgot about for five years, and that would outperform the market. I went back to Japan, discussed with our analyst population and decided to launch a ‘Japan 2020’ series. This research series was basically to select several companies in Japan where the analysts felt strongly about sustainable growth potential in the next 10 years and then undertook a deep dive on the industry structure analysis and prepared 10-year financial projections. Some reports took almost six months to prepare and the research team successfully published a number of Japan 2020 reports in the following 12 months. Those reports were very well received, in particular by overseas investors who had historically disliked Japanese equities. The corporates also appreciated our efforts. It was a great learning tool for our analysts to go beyond the normal forecast time horizon. A year later, I went back to Edinburgh to see the same portfolio manager and I was very pleased to find he had read all of the Japan 2020 reports in detail.
Importing DM Experience to EM: From Japan to Asia-Pacific (2014–2017)
When my immediate boss in Hong Kong retired, I was asked to run the Asia-Pacific equity research department with a very talented British colleague. Even though I had experience in Korean, Taiwanese, and Mainland China markets through my technology research, I lacked confidence that I could lead the complex Asia-Pacific region with 11 offices and 13 different markets. Although I would not characterize the transition as easy, it was a lot smoother than I anticipated. Many of the skills and experience I had accumulated as an analyst in Japan readily transferred to other markets. With a little sensitivity towards cultural differences, the process of training junior analysts and motivating senior analysts was surprisingly similar in different countries, not easy but similar.
Even more pleasing, I found I was able to help analysts deepen and broaden their thoughts on a number of industries in emerging markets (EM) by providing my experience from developed markets (DM). When we wanted to analyse the future of the convenience store business in Thailand and Taiwan, we had to study the history of the industry in Japan and Korea in detail. If we need to have a 20-year vision of the supermarket business in India, we have to study US supermarkets in the 1970s. Japanese furniture chain stores could give us strong insights into the future of Chinese furniture makers. When we wanted to conduct long-term steel demand forecasts for India, it was very insightful to compare ‘steel intensity’ (consumption of steel versus GDP) across various different countries. It sounds a very basic thing to do but I was surprised to find not many analysts in these growth markets spent sufficient time learning from the histories of developed markets.
When I started to lead the Investment Review Committee in Japan and to deal with the industries I was unfamiliar with, I needed to develop the skills to pick up the salient points quickly without knowing all the detail. Having been involved in the Japanese equity market for almost 20 years by then, if I heard the name of the major listed companies, I at least had a rough idea of what they all did. But when my remit expanded to Asia-Pacific, I could not even pronounce the names of the majority of companies. It was not easy to provide sensible advice to improve the quality of analysis and to avoid pitfalls just listening to 20–30-minute presentations about companies I had never heard of.
The tools that helped me substantially during this learning period included ‘time machine analysis’ and ‘pattern recognition analysis’. Time machine analysis simply compares development of the same industry across different countries. Pattern recognition compares different industries in different counties with similar industry dynamics. For example, an analyst wanted to argue that Chinese steel companies would go through a consolidation phase as a result of the regulations linked to severe emission requirements, and that this would result in less earnings volatility and higher stock valuations. However, while there were no obvious examples in the steel industry to illustrate the impact of these changes, the hard disk drive industry in the United States had been through similar changes in the past. So, the analyst was able to study the dynamics of the hard disk drive industry over several years and see whether there were any similarities with the Chinese steel industry. Although none of these analysis tools can make a perfect magic mirror, they can give provide a bit more conviction to our view.
The import substitution theme in the Chinese market was another really interesting example of leveraging DM knowledge to EM. When I was visiting China regularly as an analyst during the period 2000 to 2008, China was already widely known as ‘the factory of the world’ and was manufacturing a variety of products to export to global markets. But the factory managers I met often said that while they were able to source most of the basic parts from China, certain key components and materials had to be sourced from Japan or Europe, which prevented them from further cost reduction. Following that, I started to notice some Chinese companies gradually localizing the manufacturing of such key parts and materials, while at the same time the government was pushing the upgrading of manufacturing industries. I thought it would become a prevailing growth theme and looked for companies who would benefit from this shift. One good recent example as a continuation of this theme was a manufacturer of hydraulic components used for construction machinery. The Chinese company basically produced a similar quality of hydraulic components with a lower cost compared to Japanese companies and thus has steadily replaced the latter in the Chinese market over the past several years.
Unlike developed markets, small–mid cap coverage is generally very thin in growth markets, especially among global research houses. Hence, finding attractive growth companies was a very effective way to identify alpha generation opportunities. This approach is particularly effective with the China A-share market (Chinese companies listed onshore in Mainland China) where the more than 3,000 companies currently listed operate in a full range of industries from services to manufacturing. Usually, those interesting growth companies are first discovered by local investors but increasingly foreign investors have the chance to find hidden jewels in certain areas such as low-profile specialized industrial products that may not be as fully appreciated by the local investor base. Some foreign investors have seen the industry dynamics and growth of very similar companies in their home markets and hence immediately understand the opportunities.
Connecting the Dots: From Asia to Global (2018–now)
After leadership changes, I was given the opportunity to cohead the Global Equity Research department with a US-based colleague. My cohead used to be one of the legendary ‘all-star’ technology analysts in the US market and it was very natural for him to lead the global team from the headquarters in New York. So, I defined my role as ‘connecting the dots’, with the aim of substantially improving our global connectivity between analysts. Taking key advantage of my position in Asia, I put a strong emphasis on educating non-Chinese analysts about China and in turn educating Chinese analysts about the global situation and read-across for their companies.
Many industry teams already host regular global calls and frequently share information. But I did find that in many cases the analysts did not heavily debate and reconcile their disagreements because they did not want to step on the toes of other analysts. It is acceptable to not reach full agreement on everything, but there is a lot of value to everyone in having a quality debate. It was fascinating to see the business model differences of the food-delivery business by country, but the analyst teams never quite fully understood these until they held in-depth global discussions on it. Auto-industry analysts in each region have different nuanced views regarding the electric vehicle adoption curve. Having an open debate on why they have different views is likely to be extremely beneficial to everyone in the global team.
It is also fascinating to find a perception gap across different markets. Even though we believe there is almost no time lag in accessing most investment related information, I was quite surprised to see a large perception gap on climate-control-related matters across different continents. Market participants and corporates in Europe were extremely serious about decarbonization of the economy and were taking various actions by 2018 when I first started this global research role. The US market, at least in my view, was substantially less sympathetic about CO2 emission issues at that time and Asia was somewhere in between the United States
