Mr. Garcia, as the equity fund manager of the Berenberg Emerging Asia Focus Fund, your focus is on emerging Asian markets. Last year, you surpassed the significant milestone of €100 million in assets under management. In your opinion, what were the reasons for this?
I believe there were essentially three key factors. First, our strong performance – we significantly outperformed both our benchmark and most of our competitors. Second, building a compelling three-year track record helped us enormously, especially in combination with Morningstar’s 5-star rating. Third, it’s important to remember that Asia as a market has surprised many over the past three years and has clearly outperformed regions such as the US, Europe, and Japan. Many investors have realised that Asia is no longer just a tactical allocation but is increasingly a structural growth market. We were able to benefit from that.
The region is currently benefiting enormously from the AI boom in the market, and some of the region’s leading indices have more than doubled over the past 12 months. Why are Asian emerging markets at the center of the current AI boom?
Many people underestimate just how central Asia is to the entire AI boom. Over 70% of the global AI supply chain is now located in Asia – from semiconductors and packaging to testing equipment and server infrastructure. Without Asian companies, the entire AI revolution simply wouldn’t work. We’re not talking about speculative startups here, but highly profitable market leaders with strong cash flows, technological barriers to entry, and often surprisingly attractive valuations. That’s exactly why we continue to see enormous potential in Asia. An old stock market saying goes: During a gold rush, you shouldn’t be digging for gold – you should be selling shovels. That’s exactly what many Asian tech companies are.
As Asia’s largest economy, China is always a focal point for investors. Yet despite the global AI rally, Alibaba and Tencent, the tech giants of the People’s Republic, appear to be struggling. How does this all fit together, and how do you assess the competitive landscape for Chinese tech companies?
In China, we make a clear distinction between AI users and AI providers. We currently view AI users with a degree of scepticism. Many are required to make massive investments, while their core businesses are suffering from weak consumer spending and intense competition. We are underweight in this sector. We find AI providers – that is, companies that supply the necessary infrastructure and technology for the AI boom – significantly more attractive. These companies are already generating strong profits, have solid cash flows, and are additionally benefiting from major government investments. China is pursuing a clear strategic goal here: to become more independent in the AI supply chain over the long term.
Beyond chips, AI, and computing power, what other structural trends should investors keep an eye on in Asian emerging markets?
In addition to AI, perhaps the biggest structural trend of all for us is the demographic and social transformation taking place in Asia. Countries such as India, Indonesia, the Philippines, and Vietnam have extremely young populations – often more than 60% of the population is under 35 years old. This is an enormous driver of growth in the long term. Many of these economies are only at the beginning of a massive consumption cycle. Household debt levels are still low by international standards, while incomes, urbanisation, and access to financial services are rising rapidly. We are currently witnessing the emergence of an entirely new middle class there. People are opening bank accounts for the first time, taking out insurance policies, investing in education, traveling more frequently, engaging in digital consumption, and spending more on health and lifestyle. This creates enormous opportunities for companies riding this consumer trend. What many forget is that as prosperity grows, consumer behaviour changes as well. It is no longer just about basic needs, but increasingly about quality of life, entertainment, health, and so-called ‘dopamine-driven consumption themes’ – namely gaming, social media, beauty, travel, and premium food.
Alongside China, India is the dominant force in Asia. Population growth, rising domestic consumption, and a growing capital market: on paper, India has a clear growth story. So why has its stock market been lagging behind for more than a year?
In our view, India remains one of the most attractive growth stories worldwide in the long term. In the short term, however, the market lacked some momentum. One reason for this is certainly that India has so far benefited significantly less from the global AI euphoria than, for example, Taiwan or Korea. Added to this was a short-term cyclical slowdown in consumption and investment, which temporarily impacted the earnings growth of many companies. At the same time, the valuations of many Indian stocks were simply very high. The market had already priced in a great deal of optimism. As a major oil importer, India also suffered from the geopolitical tensions surrounding the Iran conflict and higher energy prices. In the long term, however, we remain constructive on India, particularly due to its strong demographics, the increasing formalisation of the economy, and the ongoing digitalisation in the country
The Iran crisis also weighed on the stock indices of Asian emerging markets (albeit, in some cases, only briefly). How are you positioning yourself in anticipation of higher commodity prices?
We closely monitor geopolitical developments and commodity prices and would adjust our country and sector allocations accordingly if necessary. However, we are fundamentally bottom-up investors. For us, the focus is on the fundamentals and the long-term competitiveness of individual companies. A persistently higher oil price would be relevant to us primarily if it were to put a business model under structural pressure or render an investment case no longer valid. Short-term market movements or geopolitical headlines therefore do not automatically lead to major portfolio adjustments for us. The decisive factor for us is always whether a company’s long-term earnings prospects are changing in a sustainable way.
The Asian market has performed very strongly this year. Why should investors continue to invest in Asia?
Despite strong performance this year, Asian emerging markets remain attractively valued by historical standards and are structurally underweighted globally. At the same time, we see a clear improvement in profitability and earnings growth. Return on equity and net margins are rising again after a prolonged period of weakness. To us, this is a sign of a structural revaluation of the entire region. Many international investors remain underinvested in Emerging Asia, even though fundamentals have improved significantly. In our view, it would therefore be risky to have no exposure to Asian emerging markets in one’s portfolio today – or to be significantly underweight – and thus miss out on the region’s most significant revaluation of this decade.
Our interview guest
Javier Garcia
Javier Garcia has been a portfolio manager at Berenberg since October 2022. He began his investment career in 2002 at Julius Baer Asset Management (later Swiss & Global Asset Management), where he became Co-Manager of the JB Global Emerging Markets Equity Fund in 2006 and additionally served as Lead Fund Manager of the JB Black Sea Fund and the JB Russia Stock Fund from 2009 onwards. From 2013 to 2022, he has been Senior Portfolio Manager Emerging Markets Equities at UBS Wealth Management. In this role, he built and managed the Global Emerging Markets and Asian Equities business. Javier Garcia holds a Bachelor in Business Administration and Economics from the University of Zurich and is a CFA Charterholder.