Pacific Horizon’s Durrant: Why the US and Europe are the new emerging markets

Balance sheets across the Asia Pacific region are ‘three times’ stronger than they were during the Asian financial crisis, according to the manager

Ben Durrant


Pacific Horizon Investment Trust deputy manager Ben Durrant (pictured) remains positive on the backdrop for Asia Pacific growth stocks, despite the difficult short-term macro backdrop for the market area.

At a media briefing in Edinburgh last week (8 November), the £489.7m Baillie Gifford trust manager said: “A lot of the great growth businesses – the Tencents, the Alibabas, the Baidus in China – are on stupidly low valuations even by deep value investor metrics.”

“Alibaba on a trailing basis has a 17% free cash flow yield. Where do you get that from an internet business that’s growing? And it has a fantastic competitive position.”

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According to its latest factsheet, the trust’s portfolio has a 26.7% weighting to China, while India forms the trust’s largest regional exposure at 29.6%.

“We’re primarily investors in companies rather than countries. We’re looking for the best investments in Asia on a long-term view and we’re in a fortunate position to insulate ourselves and our clients from much of the noise and short termism in markets,” Durrant said.

“There have been times when the team has been pretty sceptical on [the Asia-Pacific market], but now we feel much more optimistic.

“That’s because, if you were to go back 25 years and replay the same [macro] situation you have now with a rapidly strengthening dollar, the enormous shock from Covid… and then this geopolitical uncertainty, you would have had a crisis and we’d have been trying to name it at this point in time rather than trying to invest in it.

“But instead, you have a much stronger position in Asia. Balance sheets are nothing like what they were coming up to the Asian financial crisis, for example. Asian countries have fortressed balance sheets now. They’re about three times stronger in terms of cash to cover short term debts.

“And when you look at their capital flows, no longer are they requiring benevolence of Western investors, governments, banks, to fund their investment needs, but instead and somewhat bizarrely, they are funding the consumption of the US and the West instead.”

Europe and US the ‘wild west’

Durrant, who was appointed to manage the trust in January, runs the portfolio alongside lead manager Roderick Snell.

Pacific Horizon has returned 233.6% over the last decade according to data from FE Fundinfo, more than double the 105.4% sector average.

According to the AIC, it trades at an 8.9% discount to net asset value.

In general, valuations in the region look attractive compared to other markets, according to Durrant.

“Relative to expectations, we think things look quite good for valuations here. The US has some fantastic companies, but on average, the US market is trading at around 30x on an adjusted basis, whereas Asian markets are in the low teens. So you have valuations that are almost a third of that of the US, while you still have – on a long-term basis – higher fundamental growth rates. That is why we’re pretty comfortable.

“And then on the top down view, we are not contending with big questions such as: what on earth is going on in your central bank? So in a weird way, as my colleague Roddy [Snell] likes to say – it’s the US and Europe which are now the emerging markets, the ‘Wild West’, whereas Asia is the conservative economies, which certainly feels back to front compared to history.”

Cautious on India                                                          

Despite India making up the largest slice of the portfolio, the Pacific Horizon managers are taking a cautious approach to the market.

“India has always got such potential, and when you have so much uncertainty elsewhere in Asia it is one that people naturally turn into. We think that actually, that makes us less enthusiastic, because you see that reflected in valuations but it doesn’t really change the fundamentals,” said Durrant.

“We own quite a few businesses in there despite that, but it’s certainly one that would be very easy for us just to feel good about it because most of our companies have done very well in India and we could pat ourselves on the back. But actually, we’re thinking quite carefully about valuations there, because they certainly feel elevated.”

A particular area of interest for growth investors is the IPO market, which Durrant sees growing rapidly in Bangalore in particular.

“If you go to Bangalore, you really see a vibrancy in terms of the startup scene which you had not before. There are literally millions of great IT engineers in India, but historically they’ve stayed within the IT outsourcing firms – the Infosys, the TCS of the world – because they didn’t have the opportunity to build their own businesses, they didn’t have that big domestic market, and they didn’t have the funding to build companies to go abroad, either.

“That’s changed because with the world’s cheapest data in India, now you have businesses that can access that domestic market for entertainment, commerce etc, and then with the bull run in private venture capital, India has been a big beneficiary in terms of funding. It has created a hub of startup companies in Bangalore that we think is really promising now.

“You have more unicorns created over the last year or so in Bangalore than you’ve had in the last decade in India. And that feels quite exciting for us as primarily public market investors, because the startups today are the IPOs of tomorrow, and the long-term holdings of the next day after that. So we’re excited there, but as I said, you always need to be cognisant of valuations.”

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