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Schroders' Parbrook: Asia isn't in bubble territory - yet

Schroders' Parbrook: Asia isn't in bubble territory - yet

Asian markets are still some way off a bubble, Schroder Asian Total Return (ATR) manager Robin Parbrook has argued, but he is de-risking his portfolio just in case.

Asian indices are up around 25% year-to-date and fears of a bubble are growing but Parbrook said ‘we can honestly say that at the current point we do not think we have a bubble in Asian equities – yet’.

‘Many of the valuation measures we look at – such as price to core earnings and the percentage of stocks that trade below our estimate of fair value – are expensive, but they still have some way to go compared to the bubbles of 2000 and 2007,’ he said.

However, the manager of the £260 million trust, said there were ‘clear signs of froth in the markets’ and as a precaution he is aiming to ‘further de-risk the portfolio gradually if current market conditions persist’.

‘At the moment we are likely to do this principally via the purchase of put options,’ said Parbrook.

He said buying the protection of put options was ‘relatively cheap’ as the Vix, a measure of volatility known as the 'fear index', hit its lowest ever point in July due to ‘euphoric market conditions’.

While buying put options has been straightforward for Parbrook, he said that with individual stocks ‘we find ourselves in more a conundrum’.

‘At this point in the cycle we would normally be looking to switch into lower-risk stocks that have lagged, while taking profits from higher beta holdings that have exceeded even our high estimates of fair value,’ he said.

‘This time round we are struggling. We think many of the less market-sensitive sectors which look cheap may stay cheap as they face disruption – [such as] utilities, telecoms, consumer staples, commodities.’

He said the winners were likely to continue being ‘big platform companies with all the data flows’ such as Alibaba (BABA.K) and Tencent (0700.HK).

‘Unless valuations really get silly we are not inclined to aggressively trim these winners yet,’ he said.

Parbrook (pictured) is also avoiding ‘overhyped, sexy, untested models’, including Taiwanese and Korean biotech start-ups and private equity-backed IPOs.

He is adding to areas like financials, domestic Australian companies and Hong Kong office properties where he believes the ‘threat of disruption is less or has been overhyped’.

Over the past six months to 30 June, the trust has reported a net asset value (NAV) total return of 19.2% compared with 14% for the MSCI AC Asia Pacific ex Japan index.  The trust currently trades on a discount of 0.7%. far below the 9.5% average discount in the Asia Pacific ex Japan sector.

Numis analyst Charles Cade said the fund had performed ‘relatively well’ since Schroders took over management in 2013, with NAV total returns of 71.6% versus 49.5% for the index.

‘The discount, currently 0.7%, has narrowed over the past 12 months reflecting the fund’s strong performance and the fund has sold shares from treasury to meet investor demand – the fund has authority to resell treasury shares at a discount of up to 4%.’

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