Morningstar Magazine - June/July 2018 - 46
Dispatches
Highlights From the
Asia-Pacific Pick List
AUSTRALIA + NEW ZEALAND
Australia
The removal of Australian financial-services
company AMP AMP:AU is one of several changes
made to Morningstar's Asia-Pacific Equity
Pick List for May. The list concentrates primarily
on companies with moats that are trading
at attractive valuations.
AMP's removal comes "after our analyst downgraded its fair value after shocking
revelations regarding the company's misconduct
and poor corporate governance at the Royal
Commission," says Lorraine Tan, Morningstar's
regional director of equity analysis, Asia.
As the commission's inquiry into malpractice at
banks and financial-services firms continues, the
negative sentiment directed at Australia's
banks has hit the share prices of Commonwealth
Bank of Australia CBA:AU and Westpac Banking
WBC:AU. Both hold wide moats, and Morningstar
still regards them as undervalued. Commonwealth
Bank's and Westpac's price/fair value
ratios were 0.86 and 0.83, respectively, at the
end of April.
While Morningstar's senior banks analyst, David
Ellis, expressed disappointment at the
behavior uncovered by the Australian Prudential
Regulation Authority, he is confident that
Commonwealth Bank will make the necessary
governance and culture remediations.
"Sincere apologies and heartfelt contrition from
chairman Catherine Livingstone and CEO Matt
Comyn provide confidence that the bank is
taking the APRA report very seriously," he says.
Commenting after Westpac reported earnings
in May, Ellis says: "We liked the 'clean' $4.25
billion cash profit, up 5.8% on a year ago, with the
bank benefiting handsomely from no major
management and operational distractions, other
than the Royal Commission, currently experienced
at major bank peers."
46
Morningstar June/July 2018
Narrow-moat QBE Insurance Group QBE:AU also
has a place on the list, with a price/fair value
ratio of 0.76. Ellis expects the current gap between
price and fair value to close.
"We are quietly confident that new CEO Pat Regan
can deliver the operational and financial
turnaround required to deliver a sustained uplift in
shareholder value," Ellis says. Even at this
early stage in Regan's tenure, he sees "promising
signs of a noticeable improvement in earnings
quality," though it will be at least 12 months before
these are reflected in financial accounts.
In the healthcare sector, narrow-moat Ramsay
Health Care RHC:AU is considerably
undervalued, with a 4-star rating and a 0.75
price/fair value ratio.
The largest private hospital provider in Australia,
Ramsay's scale underpins "a sustainable
competitive advantage that drives both cost
advantage and a reasonable level of pricing power
in negotiations with private health insurers,"
senior equity analyst Chris Kallos says. He believes
government policies will continue to insulate
private hospitals from substantial "funding-related
disruptions" and applauds Ramsay's move into
community pharmacy.
Singapore-based Oversea-Chinese Banking O39:SG
and Hong Kong's Swire Properties 01972:HK were
also removed from the pick list for May. New
additions are Ping An Insurance 02318:HK,
Mitsubishi UFJ Financial Group MUFG, and Beijing
Capital International Airport 00694:HK.
Though it holds no economic moat, Ping An
Insurance has a 4-star rating and traded at a price/
fair value ratio of 0.78 as of April 30. No-moat
MUFG is also rated 4 stars, with a price/fair value
ratio of 0.81. BCIA holds a narrow moat,
a 4-star rating, and an appealing price/fair value
ratio of 0.72.
Evolution of the
Chinese Equity Market
ASIA
China
One of the more noteworthy developments in
emerging stock markets over the past two decades
is China's rise to prominence. When Chinese
stocks were first included in the MSCI
Emerging Markets Index in September 1996, they
accounted for just 0.46% of the benchmark's
value. As of March, Chinese stocks made up 29.9%
of the index's total market capitalization. This
is significantly greater than the next three largest
countries included in the benchmark: South
Korea (15.1%), Taiwan (11.8%), and India (8.1%).
This is partly a reflection of the strong performance
of Chinese stocks for the past 15 years, despite
an extended period of underperformance during
and after the financial crisis. In 2017, the MSCI
China Index surged 54.1%, while the MSCI
World Index advanced 22.4%. That said, the MSCI
China Index has also experienced much greater
volatility (as measured by the standard deviation of
its monthly returns) than the MSCI World Index.
For the 15-year period through March,
the MSCI China Index experienced an annualized
standard deviation of 25.7% with an annualized
return of 16.3%. The MSCI World's annualized
standard deviation was just more than half that of
the MSCI China Index at 14.5%, while it generated
an annualized return of 9.2%.
In the early days, the Chinese market was made
up of a number of B-shares and H-shares; more
Chinese red chips and H-shares were added to the
mix as shares were listed in Hong Kong in
the early 2000s. In November 2015, MSCI decided
to include foreign listings to the MSCI China
Index, including U.S.-listed ADRs such as Alibaba
BABA and Ctrip CTRP.
Glenn Freeman is a senior editor with Morningstar Australia.
Changes to MSCI China's sector weightings over
the past 10 years are attributable to a combination
of 1) changes to the index's inclusion rules;
2) new listings and IPOs being added to the index;
and 3) the structural transformation of the
Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2018
Contents
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