I had the pleasure of interviewing Herald van der Linde, Chief Asia Equity Strategist at HSBC who has worked in the region for over three decades.
In the interview I ask him about:
His background and what he does today
The question of business quality vs P/E ratios
Whether reported GDP growth is important
Countries with great conditions for entrepreneurship
His thoughts on the pace of Indonesian reforms
Which sectors in China that could lead the next bull market
His bullishness about Bangladesh
Herald recently published a new book called Asia’s Stock Markets from the Ground Up. It’s a practical guide for Asia’s stock markets, providing the reader with historical context and understanding of how these markets look like today. It’s written in easy-to-understand language that’s accessible to anyone - regardless of whether you have any experience investing in the region or not. You can find the book on Amazon here. The proceeds of the book go to charity.
1. Background and current focus
Michael: Welcome to Asian Century Stocks, Herald. Thank you for coming.
Herald is the Chief Asia Equity Strategist for HSBC and has just written a book called Asia’s Stock Markets from the Ground Up. It’s a fantastic introduction to stock markets in Asia, including the history and context around the key stock markets in the region.
But first, perhaps let’s start with an introduction about yourself. What is your background Herald and what do you do at HSBC?
Herald: Good, so as you mentioned I’m the Chief Asia equity strategist for HSBC, covering all the regions from Korea, to India, Indonesia, China and everything in between. There are smaller markets such as Vietnam and Bangladesh that we look at as well.
I came to the region in the 1990s, over 30 years ago now. I initially came to Asia as a backpacker when I was a student in the Netherlands. I happened to like it and then decided to stay in Indonesia for a while. I then became a tour guide in China and travelled around the country.
After graduating in 1994, I looked for a job in Asia and happened to get into the brokerage industry. I became an analyst, then a strategist and moved across the region, including Taiwan, China, a short stint in South Africa and then Hong Kong for many years.
Eventually, I grew into this job and I’ve now been looking at these markets for a good 25-30 years now.
2. Common misperceptions
Michael: You must have met many hundreds, if not thousands of investors throughout the course of your career. When meeting such investors, what do you think is the most common misperception about stocks in Asia or investing in the region?
Herald: The most common misperception is that you invest in Asia because the growth is faster. Yes, the economies are growing faster, but that doesn’t mean that company earnings are actually growing faster than elsewhere.
And then the investment universe is incredibly diverse. If you just look at both extremes they even each other out. And so in the aggregate - if you add up the earnings of all companies in the region - earnings growth in Asia has not been spectacular.
You need to dig a little bit deeper - dig from the ground up. Visit companies in these markets and you’ll find out that there are quite a few spectacular companies, spectacular stories across the reason.
But if I have people telling me that they’re coming to Asia to look for growth, then I think they come with the wrong attitude.
Buying an Asian ETF in the hope that the region will grow stronger - that type of strategy hasn’t actually worked. But you can find interesting stocks and sector ETFs.
An interesting story early on in my career in the 1990s was when people fell over themselves in order to get into Asia. There was this story that the region was supposed to grow really fast - that Asia was where the upside potential was.
Now 30 years later if you look at the S&P 500 and the Asian indices, the S&P 500 has actually done better. But if you dig into individual markets, then you’ll find that for example Indonesia has done very well and India has done well. Chinese equities have not done very well, though that could signal opportunity.
So you should invest in particular stocks, not necessarily indices, because sometimes those indices can have stocks that are not as attractive, even though the country is growing fast. The importance of stock picking is more much more important in Asia than say in the United States where you can just buy a broad market ETF and do pretty okay over the long run.
In Asia, you need to be much more active, dig deeper into specific stories in specific sectors. Be more tactical, in that sense. The markets will bounce along in all directions - much more than the US. But that’s part of the attractiveness as well, the sheer diversity that you can make use of if you’re a stock picker.
3. Selecting stocks
Michael: So if you start with a top-down view and then focus on specific areas of opportunities, how do you go about it? There many thousands of stocks to choose from in Asia, so you’ll need to narrow down your search somehow. If say Vietnam, is projected to grow fast in the next 20-30 years, would that compel you to look closer at Vietnamese stocks, or do you simply not care much at what growth trajectory a country is on?
Herald: Vietnam as a country is growing quite rapidly now because people are setting up factories there, creating employment. We’ve seen in other countries how that then develops consumer markets. Newly employed individuals start buying higher-quality, higher-priced goods, they start travelling and so on.
So yes, sometimes you’re going to start with the top-down view, but then if you’re a stock picker you can also just dig deeper into specific industries. Which industries might develop. And to understand that you have to a have a feeling for government policies.
For example, China is actively trying to develop certain high-tech industries. The government wants the country to become self-reliant in energy and high-end technology.
Now, it might not be obvious which company is going to be the biggest beneficiary. For example, if you believe that the electric vehicle market will grow, then buying the largest EV company might not necessarily be the best choice. Perhaps it’s an EV component maker that will do best in that industry.
Another way to go about stock picking is to think about demographics. People often approach demographics the wrong way. They think that populations in North Asia are ageing and that their demographics are therefore bad. And conversely, that populations in India and Southeast Asia are young and that their demographics are therefore good.
Well, if these young people can find jobs and start participating in the formal economy, then young demographic can certainly help. But that’s not always the case.
In North Asia, a lot of people are getting older but these people tend to be wealthy, and they will spend their savings on specific goods & services. For example, if you’re a wealth manager you’ll want the subset of older individuals in the population to grow.
So I don’t think about demographics as being inherently good or bad, but rather what the implications are for earnings growth and how you can benefit from that trend. So if you invest in North Asia perhaps you have to buy an insurance company or a wealth manager, whereas in Southeast Asia or India you go for a labour intensive company.
Now, there are other trends unfolding but think about those longer term policy trends and demographic trends as starting points in your search for great companies.
4. The next Chinese bull market
Michael: You first came to Hong Kong in 1990, so you’ve seen the country grow. Since those early days of the 1990s, the leadership of the stock market has shifted over time. In the early days of the 1990s, the Chinese listed universe included companies like Qingdao Beer and other state-owned enterprises. Towards the end of the 1990s, you had a greater number of Chinese tech companies listed, in the 2000s Chinese telecom stocks did well. And more recently, Chinese tech stocks have become investor favourites. What sectors of the Chinese or Hong Kong market do you think will lead the market in the next cycle?
Herald: I think the next leadership is going to be in a couple of areas where China is trying to develop itself. The country has defied gravity before you could say - done better than most people thought it would do.
They want to be self-sufficient in food, so I think food industries and especially seed technology, that’s a really interesting industry that they want to develop.
Secondly, they want to develop high-end technology. Now, that’s not just computer chips but also battery technology for EVs.
So those are the areas I would be looking at. Areas where they want to become independent, or make sure that they have sufficient domestic sources of energy.
China doesn’t have enough oil & gas - it needs to import that from other countries or regions around the world. It’s a clear strategic weakness, since the country becomes dependent on what happens in those countries. So they need to develop their own sources of energy.
In China, it’s solar and nuclear that they’re actively trying to develop. If you go to the solar industry, there are only two companies that make solar glass, so that’s concentrated industry that’s perhaps worth looking at. And then there are companies making modules or chips.
So look around the supply chain, and see whether they benefit from subsidies or other types of government regulation.
It’s true that subsidies are a double-edged sword, because if a company becomes reliant on subsidies and then the subsidies go away, stocks can come down. You’ll want to make sure that the companies still have competitive advantages even if the subsidies are taken away.
Those are probably the companies you’ll want to focus on.
5. Why should foreign investors care about Asia?
Michael: I speak to a lot of investors who have had big exposure to US tech stocks and also cryptocurrencies. They’ve done well up until a year ago, now suffering some losses. But at the same time valuation levels have come down. And earnings growth in US tech stocks had been spectacular in the ten years into COVID. So what do you tell those investors when it comes to Asia - why should they care about the region and stocks listed here?
Herald: More so than in Europe, the Asian region has some really formidable companies, including tech companies. Some of them are global leaders in their respective industries. Some of them have done spectacularly well.
For example, some of the consumer names in India have done well over the long-term, let’s say the past 20 years. There are certain Indonesian consumer companies that have done well, too.
Some of these companies end up being dominant in their domestic economies. They can end up being highly profitable investments, despite being focused on the domestic economy.
The other type of companies investors should be looking at, are those that dominate globally in their respective niches.
The other type of companies investors should be looking at, are those that dominate the world. For example, there are Japanese and Chinese component makers that have started to dominate the world in particular industries.
For example, the bicycle companies in Taiwan are now the global leaders. In the 1970s they were just selling in Taiwan and then in the 1980s, they started to export a bit, in the 1990s they did even better. Mountain bikes were a hot product at the time, becoming a craze. And the Taiwanese bicycle makers were the first one to enter that segment and they became global players in the process.
And yes, there are quite a few such companies in the US as well but don’t neglect the opportunity set here in Asia either.
6. Fertile grounds for entrepreneurship
Michael: So you mentioned the bicycle manufacturers in Taiwan, and I believe that they were probably formed in the 1960s or so, quite a while ago. But what is your view on entrepreneurship in Asia today. Is there any country that has particularly good conditions for the creation of new companies and the development of them? Any countries that stand out in that respect?
Herald: I think entrepreneurship can be found everywhere, but the ability of these entrepreneurs to succeed might differ.
I’ve met founders of companies that told me when they set it up in their 30s, they slept on the factory floor for six months, borrowed money from all their friends and family, and if it would go wrong, they knew that the family would kick them out. And they’d probably end up as a farmer toiling some fields. But many of them pulled through.
One company I have in mind is a Taiwanese company that did phenomenally well, probably a US$3-4-5 billion market cap company at the moment. So they’ve done very well on the back of [the founder’s hard work].
So entrepreneurship can be found everywhere. But there are different challenges for these entrepreneurs.
Often they come up against the establishment. There might be strict regulations or governments that make things difficult for them.
In China for example, there are existing business groups that don’t want newcomers to take market share. And these business groups can be extremely powerful. I’m thinking of examples in Korea and Japan. But you can also find examples in India and Indonesia.
Some entrepreneurs are able to get around such obstacles, and those are the ones you’ll want to bet on.
7. Valuation levels during the Asian Financial Crisis
Michael: I would talk about valuations. Do they matter much, and is there any market that you think is particularly interesting at this point of time.
Or let me rephrase that question a bit. You mentioned in the book that you lived through the Asian Financial Crisis, living in Jakarta at the time. That must have been an interesting experience living through that volatility, as the rupiah depreciated to unprecedented levels.
Herald: Yes, the rupiah depreciated a lot. And I was making salary in rupiah at the time. I was a junior analyst and my salary went down something like 90% or so. Yeah, I mean in US Dollar terms my salary would go up and down 10-15-20% a day sometimes.
It was very painful of course for a lot of people, including myself. But for a lot of other people, it was even worse.
So thinking about it from a valuation point of view, I have an interesting story on that subject. I know somebody who came into Indonesia just when the crisis had devastated that place. The stock market was down, the currency was down. Nobody wanted to invest in Indonesia and it was quiet in Jakarta. Investors didn’t come through and nobody was really investing.
I was still an analyst but it was literally quiet. A friend of mine said that this is the time to invest and he went in big - I mean, really big - and put all this money into Indonesia. He bought all kings of things. And he’s done extremely well on the back of that volatility.
Well in Asia, you can use that to your advantage if your timing is good. It’s not always that easy. But you’re gonna know that there will be volatility and then you can use that to your advantage.
The other thing you say about valuation. Is it really relevant. And yes of course, to a certain extent you don’t want to buy expensive and sell cheap. So in that sense, you’ll want to have an idea of what price you might buy at.
But on the other hand, I’ve seen certain companies that became industry leaders and continued to perform. I’m thinking about the Taiwanese chip makers, the Taiwanese bicycle makers, Indonesian conglomerates or automakers, or Indian food & beverage companies. They are all industry leaders in their respective industries and they’ve tended to continue doing very well.
If you just buy the leader it might be more expensive than some other stock in the industry. But sticking with the leader as long as you can tends to be a better strategy than saying “oh this one is a little cheaper so maybe I’ll go for that one”. Look for companies with a strong competitive advantage that will continue to do well and stick with them.
8. Markets that remind him of Indonesia in 1998
Michael: In terms of investor positioning or sentiment, is there a market that reminds you of Indonesia in 1998-99?
Herald: Yes, of course there are markets that are going through a really tough time at the moment. Sri Lanka is having a difficult time for a whole variety of reasons. The President has just left. So Sri Lanka probably reminds me a bit of what happened in Jakarta and Indonesia in the late 1990s.
But other countries have had their own crises or political issues as well. China over the past year and a half has come down considerably. The country has had growth problems.
It’s in a different dimension than Indonesia in the late 1990s as the decline of GDP in Indonesia was much bigger than China today. But sometimes markets go through particular cycles. In the up-cycle, people start to get invested, the market picks up momentum and everybody likes it. There’s a fear of missing out and you get an euphoric phase where everybody feel they need to be in certain stocks. China Internet was there about two years ago.
And then people want to sell out as there’s a realisation the story wasn’t as good as initially anticipated, and the market eventually turns, people get disappointed and eventually there’s a sort of revulsion. And people end up thinking “you can’t invest here anymore”.
We’ve had that in China over the course of the last couple of months. People say “I give up” - that you cannot invest in China anymore. My experience is that usually not the case.
Very often you get to a moment whereby actually buying just like my friend did in Indonesia when nobody was around. That’s sometimes when you really want to step in and buy stocks.
9. Investor positioning and sentiment
Michael: When you meet clients, what do they say when you mention particular geographies such as India, Japan, Southeast Asia or similar. Is their reaction similar - are they bullish?
Herald: Well, these things get discussed in considerable detail of course. So we’d look at the longer term trends, we’d look at the industry leaders and we’d also look at near-term sentiment indicators, how people are positioned and such.
And we are now talking in the middle of 2022. Asian funds are neutral to slightly overweight China. Global funds are really underweight China.
Last year they were really overweight China. Now they’re reducing their weight in India and moving that to China - that’s one of the big flows that are taking place within the region at the moment.
So yes, you’re going to have to have a bit of an eye for these kind of near-term sentiment and flow issues as well.
10. Jakarta and Indonesia’s future
Michael: You wrote a book about Jakarta, about the history of the current capital in Indonesia, and it seems that you also have a personal connection to the city. So I’m curious to hear about that story and what you think about the future of the country. President Jokowi has been trying to implement a number of reforms, so it will be interesting to hear your view on how successful those reforms will be.
Herald: So yes, the book is called Jakarta: History of a misunderstood city. The reason I call it misunderstood is that the vast majority of people that go to Jakarta don’t really have a good experience.
They complain about the heat, the traffic jams, how things are slow if you go from one side of the city to the other. It can a bit of time and it’s frustrating and I can fully understand their perspective and I don’t deny it.
But my experience in Jakarta has been overwhelmingly positive. As I mentioned early on, I came to Indonesia as a backpacker in the early 1990s when I was an economics student.
I met a family and lived in a small “kampung” (village) in the Southern part of Jakarta called Pasar Minggu. I had a wonderful experience.
Yes, there were traffic jams. Sometimes when I got into the train in those days, it was really likes sardines in a small can. A rather unpleasant experience if the train stopped for five minutes and you became stuck inside.
But I got to move that aside because my experience was overwhelmingly positive. I lived with these people that I had met, including a a family that I came across and came to live with. They didn’t speak English so I learnt Indonesian to communicate with them. They were very friendly and I still have contact with them to this day.
In the community, they all helped each other. If somebody was really poor and struggled, the community tried to help each other. So Jakarta at the time was all these kinds of small “kampungs” - small units of Jakarta - that were self-sufficient or self-operating. You’d have a small group of people in five-six, or sometimes 10-15 streets working together.
If somebody is born or whatever needs to be organised, or if a gutter gets clogged up, then people will come out on a Saturday to make sure that the problem is fixed. Or if somebody’s sick or struggles with money, then everybody puts in some money to make sure that they can go to the hospital and these sorts of things.
So I had a wonderful experience living there and I think that is very often not seen in Jakarta and makes me very positive about it.
There’s a lot of bad news about the city - about how it will sink and that there are different problems with flooding and stuff. That’s absolutely the case and I’m not saying that is not the case. But I think all these individual kampungs they respond individually to the treat of flooding, making sure that the gutters are clear, making sure that walls are built somewhere.
People prefer not to live in South Jakarta because it’s higher up. But the city will morph and reinvent itself to deal with these negative external circumstances. So I think the city will come through. So I’m hopeful for the future of Jakarta.
You asked about reforms. What’s interesting for me when I lived there was that they were putting a lot of infrastructure in place. I remember travelling, for example, to Bandung in those days. It could take hours to get there. Today, it’s much faster, because successive governments’s efforts. But in particular, Jokowi has put a lot of work on new infrastructure that’s been put in place.
Moving across Java is much easier now. I’m actually going there in a couple of weeks to East Java for my own new research project. I want to see some temples. Getting there now is going to be much easier than it was in the 1990s.
That also means that if you want to set up a factory in Central Java - and I know companies that have done so - it’s much easier now. You can get your goods out on a truck to harbour. 25 years ago, the trucks would get stuck in traffic and there was no harbour, so you’d have to go all the way to Jakarta.
But now there’s a harbour and a highway so trucks are unlikely to get stuck in traffic. That enables companies to put factories in central Java then ship their products out directly. That enables employment opportunities in manufacturing central Java, helping incomes rise and improving consumer markets.
As an investor, you can think “how can I benefit from that, what company should I buy that can actually penetrate from that new source of growth”. There’s a whole bunch of Indonesian companies you can look at: from herbal drink producers, to auto manufacturers to banks - you name it.
So understanding how that place changes allows you to come up with new investment ideas.
11. Opportunities in Bangladesh
Michael: You’ve expressed bullishness about Bangladesh in the past. It’s a big country with 160-70 million population. Not many people have been to Dhaka - much less invested in it. Tell me about your fascination with Bangladesh and especially the Bangladesh stock market.
Herald: Yes, I’ve been to Dhaka multiple times and I’ve got stuck in those horrendous traffic jams. You have them in Bangkok, Manila and Jakarta as well but Bangladesh’s [are special].
In about 8-10 years time, at the end of this decade, Bangladesh will will be one of the top 10 consumer markets in the world. It will be bigger than the UK, bigger than Germany.
It’s a market that nobody is looking at. Of course, it’s in the very early stages of development but people are well educated, factories are being set up, and employment is rising. People are getting new jobs, just like in Central Java as I mentioned earlier.
So in that sense, these development have taken place in other countries. People start to consume differently - they’ll want to have bigger houses, and go from motorcycles to a car and these sorts of things. So I think that’s going to develop. We already see this happening in Bangladesh.
In the long run, there’s a couple of things you need. You need good infrastructure, you need hard infrastructure, you need good education and you need law & order.
It seems that Bangladesh in its own way is trying to make this work. So I think Bangladesh could be a success story. Everybody loves Vietnam right now. It’s an up-and-coming stock market and people are excited to go there.
I suspect that by the end of this decade, people will want to go to Bangladesh instead. So if you invest today you’re going to be early. So this is the time to look at that market.
12. Asia’s Stock Markets from the Ground Up
Michael: I would like to talk about your book Asia’s Stock Markets from the Ground Up. Feel free to introduce it and speak about where you can find the book.
Herald: The book is written for people that are not my clients - people who are not institutional investors. That haven’t lived in the region for 10-20 years. But are interested in stock markets in general and don’t want to go through some finance textbook with theories and such.
Instead, the book goes through stories such as the ones we spoke about just now. These stories can help you understand Asia and their stock markets as well.
I’ve tried in the book to make it very easy to read, easy to digest. And also tried to introduce stock markets, companies and sectors that you should be thinking about.
Michael: I want to thank you so much for taking the time speak with us.
Herald: Thank you very much and thanks’s for the invite.
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