Playing Asia Without China: Inside Jason Pidcock’s High-Conviction Portfolio

0:00Investing in China is an unnecessary risk. There are plenty of other markets in the region where risks are lower, where we think returns will be higher. Communism is not conducive to satisfactory shareholder returns. It's the political system which has meant that a lot of wealth that has been generated in China and standards of living have improved, quality of life for many people has improved, hasn't translated efficiently into EPS growth and shareholder returns. Given that we have India within our remit, we just don't feel that we need to invest in any other emerging markets in the region. The size of its population, the population is still growing, GDP per capita is growing as well as total GDP.

0:45We've got five companies that we feel are very well managed and we're playing domestic consumption in India, which we think will grow at least as fast as any country for the foreseeable future. My overall bit of advice was do what feels right for you, trust your gut feeling. don't just follow other people or take other people's advice because it's been given. Having said all that, I think if you're thinking about getting into this from the point of view of a profession, I would say if you're a very emotional person, don't do it. It'll drive you crazy. Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you our listeners, The Edge.

1:31The Master Investor Podcast is sponsored by Interactive Brokers. Please do remember the views expressed in this podcast are for general informational purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. I am delighted to welcome my guest today. Jason Pidcock is the manager of the Jupiter Asian Income Fund. Jason and I know each other very well. Jason used to be my boss when we were both at Newton Investment Management. And Jason, I still remember firstly, engineering my way over to work for your team halfway through my time at Newton.

2:16And then also remember resigning in 2014 and being filled with dread at the prospect of telling you I was moving to pursue a broadcast career. Honestly, it all slightly feels like yesterday, even though it wasn't. And it is just such a pleasure to have you on the podcast. Welcome. It's really great to be here. Thanks, Wilf. And that, back then, of course, was the earlier years of the strategy that you've developed so successfully. It's called the Asian Income Strategy, previously the Newton Asian Income strategy. Now, of course, the Jupiter Asian income strategy. And you launched that initially 20 years ago.

2:54Exactly 20. November 2005. Yes. So it's perfect timing to have this chat. And pretty much 10 years ago when you switched and moved to Jupiter. That's right. Joined Jupiter in November 15. And what's the size now of the fund? So the main fund, the unit trust is about two billion pounds, just over two billion pounds. and we have a couple of other funds, an offshore fund. It's just over$100 million. And then we have a small fund that we've only recently launched to target clients in Japan, but that's quite small at the moment. And how, I can still remember how we would sell it back in the day when I was working with you, but how do you describe what the strategy is?

3:35It's not just simple Asian equities, the Asian income strategy in particular. We're looking to maximize total return over the long term. Part of that coming from capital growth. In fact, probably more than half of the total returns coming from capital growth and the rest from income. So we're looking to buy into growing businesses that through higher earnings will pay higher dividends. So it's very simple in a sense. There's only 25 holdings. We don't mess around with any derivatives. There's no currency hedging. There's no fixed income. but we're fully invested in 25 large typically companies that we think will perform well over the long term.

4:13One of the things I remember we used to say in the sales pitches 10 or so or 12 or so years ago was if you're investing in emerging markets and I guess a lot of Asia is less emerging now it's more closer to developed if not developed you have a slightly greater protection to the potential bad eggs that might be in emerging markets because of that aspect of paying a dividend. Does that still apply in the marketing pitch or not really? It does apply. We like to think that the portfolio is relatively resilient, relatively robust. So by investing in companies with strong balance sheets, and today 10 of our 25 holdings are in a net cash position, the other 15 have low levels of leverage relative to their business model, i.e.

4:59relative to the visibility of earnings and cash flow. We do think there is resilience and historically we have typically had shallower drawdowns when the market has gone backwards. So the strategy naturally has a low beater but over the long term we have outperformed a rising market. And the performance if we snapshot five years has been fantastic. The fund is up over 80 % compared to the benchmark up just under 40%. So over 40 % ahead of the benchmark over five years. The three-year performance is strong. One year, you've lagged the benchmark and year to date. Snapshot for me why you think it was so strong over five years and weaker over one year.

5:43We did have a tough 2020 and performance numbers, they can look great over a period if the starting point was in a relative dip. 2020 was tough for us, having had a good 18 and 19. But when Pfizer announced the effectiveness of their vaccine in November 2020, there was quite a rotation in markets, and that absolutely suited us. We then had a very strong period all the way through to September 2024, when China from a very low level, having underperformed seriously for quite a few years, then did bounce back from those low levels. So China has had a better year. We don't have anything in China. That's impacted performance a little bit negatively, although we have, to a degree, made up for that with stock selection elsewhere.

6:36I want to touch on general market sentiment, including the US, before we get into the Asia case specifically, because I think it influences so much about risk assets globally. What is your take in terms of the outlook in the US? I guess in particular for monetary policy, but also fiscal policy, because it does influence liquidity globally and Asian markets as a result. That is still definitely true. We are expecting interest rates to come down, probably next month, December, from the Fed cutting rates, and in the first six months of next year, when the new Fed chair starts in May. I wouldn't be at all surprised if one of their first actions is to cut rates further from wherever they inherit them.

7:25I suspect that the candidates for that role, part of the way that they'll get the job, is to promise that monetary policy will be looser. Fiscal policy is still quite lax. I mean, the budget deficit is enormous. And that's one of the reasons why the gold price has been very, very strong. But there's a lot going on in the US, a lot of investment at a government level and at a private sector level. I think there's this realization that China was catching up and in many cases overtaking. And so there's a reaction to that. So we are getting more state capitalism. The government is getting involved in the economy in lots of different areas.

8:09And that's kept growth quite buoyant. Inflation hasn't quite retraced to low levels, but there's a lot of pressure to cut rates anyway. And my view is there are deflationary forces coming through. And so it probably will be okay to cut rates more. And what about the market as a whole? I mean, there's lots of legitimate arguments for why stocks are richly valued in the US. Are they overvalued? And I guess the leading question on this is if you see a big market crack in the US, will that, like it's often the case, drag down equities globally? Markets are still correlated. And I think a big crack in the US inevitably would lead to weakness elsewhere.

8:51But what we have seen in the past is some markets can recover quicker and regain new highs if they're not too expensive. When the US cracked in October 87, Japan fell, but then rose more quickly and made new highs until they had their own problems. We don't see valuations in Asia as expensive, even in the tech sector. The tech stocks we own, and it's a sector where we're overweight. their 2026 PE is mid to high teams. That doesn't look expensive to us given the growth prospects, strong balance sheets, and higher dividend deals, which are much higher than counterparts in the US. So there may be one or two companies in America that do look expensive, but I think this theme of this AI-led tech move, I think it's here to stay for quite some time.

9:47Let's talk about where you're positioned across Asia. 100 % of your funds are invested in just five markets, Taiwan, Australia, Singapore, India, and South Korea. I mean, what jumps out most notably, and I remember you're always rather bearish towards China, but zero allocation in both China and Hong Kong? Yes. Why is that? We're looking to maximize total returns for shareholders over the long term and not take unnecessary risks. And to my mind, investing in China is an unnecessary risk. There are plenty of other markets in the region where risks are lower, where we think returns will be higher.

10:28I began my career investing in Asia towards the end of 1993. Since 31st of December 1993, MSCI China index is up about 38 % in US dollar terms. It's gone nowhere in 32 years. Australia is up over 1 ,800 % in US dollar terms. Now that stat often surprises people, but it shouldn't really. Communism is not conducive to satisfactory shareholder returns. It's the political system which has meant that a lot of wealth that has been generated in China and standards of living have improved, quality of life for many people has improved, hasn't translated efficiently into EPS growth and shareholder returns.

11:17So as an investor, if I want to play growth in China, I'd rather do that indirectly by companies domiciled elsewhere who can successfully sell into China rather than playing Chinese businesses themselves. Those stats are crazy, even though I know the sort of simple points of your preference for Australia over China there. What about what China is actually doing domestically? Because you mentioned the extent to which they were catching up. And do you witness, I think on two big areas, a lot of people talk about AI innovation and robotics innovation, that China is almost as good as the US, better than the US or not?

12:00Yes, there are plenty of areas where China has leapfrogged the US, still behind in the very, very high-end chips that the likes of NVIDIA design and TSMC actually manufacture. But in many areas, China has caught up and more patents are issued in China than any other country. Their energy costs are lower, which is a big advantage. I mean, they still use a lot of coal for baseload energy, but they have solar and other greener forms of energy as well. And I think going forward, that's going to be important for countries to try and lower energy costs where they are high, especially for industrial users.

12:48Robotics, you mentioned, I mean, in the next 10 years, I can see humanoid robots becoming commonplace, becoming mass market items. I suspect the key period will be between 2030 and 2035 that they really take off. And there will be American, Chinese, probably South Korean and other manufacturers. Globally, I'm not sure people in democracies will be entirely comfortable buying a Chinese-made humanoid robot. But I'm sure in China, other emerging markets, Asia, they'll probably be more affordable and therefore more appealing. But there is this race going on between the US and China. And we either get to a point where you see a decoupling and you see different technology standards, or you get to a point where one country has clearly exceeded the other in most areas.

13:42And then it becomes difficult for that other country to catch up. Just quickly on their demographics, how much is that going to work against them? I mean, maybe robotics will offset it, but is it a real challenge or something that they've kind of already started to try and turn the table on? It is a headwind. And over the last 30 years, demographics were a tailwind. The one-child policy distorted things, but it kept the dependency ratio low for quite a period as younger people made up a smaller proportion of the population. Now, even though they've abandoned the one-child policy, the birth rate's still very, very low.

14:25So the total population is shrinking. The working age population is shrinking. People, as in other countries, will end up working longer if they need to, and robots will help. But the economy's not very efficient. And so even though fewer people are joining the workforce each year, youth unemployment is still very, very high, at around about 16%. So I think demographics are certainly a challenge. Urbanization has more or less played out, whereas that was a tailwind over the last 30 years. And exports can't grow at the pace that they had done over the last 30 years going forward because of the law of large numbers.

15:05So there are a lot of challenges to China's economy as there are to most economies in the world.

15:17This podcast is sponsored by Interactive Brokers. Building wealth starts with the right broker. Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs, and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at IBKR.com forward slash master investor. I'm interested in your take on the China-Russia friendship. I remember back in what would have been 2012 or 2013, you saying China and Russia will become great friends and the power balance will switch from Russia being the senior partner to China and everyone in the investment committee sort of rolling their eyes.

16:04It certainly played out. Will it last? I mean, is this a genuine friendship or not? And I guess weighed in with that, as you said, that there's a chance that there's two future technology stacks going forward or not. Is President Trump right to seemingly play a bit softer all of a sudden and say he's going to visit China and try and become friends and make up again? I think between China and Russia, to a degree, it is a pact of convenience. It suits both at the moment and maybe whilst the two leaders, Putin and Xi, are presidents. Perhaps it will for the extent of their leadership, but I'm not sure that it will beyond those two leaders being in power, because Russia is becoming weaker and weaker by the day.

16:56There's very little private investment taking place, and especially in this tech world, Russia is losing out. With energy prices, oil and gas, being low at the wholesale level, that doesn't suit Russia. So Russia's leaning very heavily on China. It's becoming very reliant on China. And perhaps China one day decides to take advantage of that weakness. We shall see. But it's going to be a very distorted or lopsided partnership. What about the US sort of decision to cool things off, it seems, with China? Is that sensible or what's behind that? I think the U.S. belatedly woke up to the extent to which China is a risk to national security, and everybody received more information about the extent of state-sponsored industrial espionage and cyber attacks, etc.

17:56So I think the US is taking China very, very seriously as a counterpart, as a political foe. But they're sort of hedging their bets as to how to deal with that. And so there'll be a few months where there seems to be great friction, and then there'll be a few months where seemingly relations are improving. I think the key sticking point for now is access to rare earths. And for the next five, six, seven years, that's going to be an issue. Until the US gets supply from other countries, it is going to be quite reliant on China. Once it does have that supply, then I would expect decoupling to continue at a more rapid rate.

18:50If that's the sort of view towards China being such a security threat, why then do you have, I think, 30 % big concentration of your fund in Taiwan? Is there no risk that Taiwan gets seized? Taiwan is a functioning democracy and Taiwan hosts some phenomenal companies that are absolutely world-class. If we want to play the theme that we're currently playing in tech, particularly tech hardware, with a bias towards AI, the best place to do that right now is Taiwan. If we weren't investing in as much in Taiwan, we wouldn't have as much exposure to the tech sector in the way that we want to. Of course, we have to think about that risk.

19:38And although hope is not a good basis for investment at any time, we all have to hope there's no huge geopolitical disturbance in that part of the world, because that would affect equity markets everywhere. And I would say, to a degree, there is a discount in Taiwan, Taiwanese equity prices today, when thinking about that risk in a way that there isn't a discount to companies in the US and elsewhere who are utterly reliant on supply from Taiwan, from the likes of TSMC, the likes of Hon Hai. I don't think US investors think about the fragility of NVIDIA, Microsoft, others, Apple, to any interruption of supply.

20:27So we have to hope that nothing happens. If it does, the outcome is certainly not guaranteed. But I think the world's democracies don't want to see a democratic country invaded by a communist dictatorship. So touch on that theme for me, because obviously a lot of people at the moment think the only way to play AI is in the US. And it's very richly valued. You have, what portion of your fund do you think is sort of in it? You said TSMC, Honhai, I think MediaTek, some others. Yes. Cumulatively, it accounts for what portion? We have 37 % in the tech sector altogether. So four companies in Taiwan, one in South Korea, one in India.

21:09But the big ones are the Taiwanese stocks and Samsung Electronics in South Korea. So I would say... What are the valuations relative to the US peers? Much lower. So TSMC will be the most expensive, and that's on sort of around about 20 times, but PE coming down steadily. The others are really in the mid-teens levels. We are going to see rapid earnings growth next year, particularly from Samsung as it bounces back. They've got a lot of pricing, much more pricing power now. So the valuation is, I'd say, more than a 40 % discount to a lot of the richly valued names in the US. And from a dividend yield perspective, which is very important to us, we're getting an average yield of about 3.4 % from our tech stocks.

21:59I think the average of the MAG7 is probably less than about half a percent. I'm not an expert, but that's my guess. I think it'd be less than a quarter of a percent off the top of my head guess. So that is a big difference. A big difference on those valuations. So I want to move on and talk about India. Yeah. I was looking through your website and some of the materials. You say it's the most attractive developing market in the world. Why? Because of the speed of its growth and the size. And so given that we have India within our remit, we just don't feel that we need to invest in any other emerging markets in the region, not even Indonesia, because India just dwarfs all the other emerging markets, putting China to one side.

22:45size of its population the population is still growing gdp per capita is growing as well as total gdp the scale there there are plenty of well-managed businesses there aren't a lot of high yielding stocks but we only need a few we've got five companies that we feel are very well managed and we're playing domestic consumption in india so very very different from taiwan where we're playing global demand in one sector different parts of a sector but one sector In India, we have five stocks with virtually no overlap between their business models. But as a whole, they're a great proxy on domestic consumption in India, which we think will grow at least as fast as any country for the foreseeable future.

23:28And what's the sort of corporate governance like there? Not so much compared to China, but almost compared to India 10 or 20 years ago. Do you celebrate it or does it leave still some room for improvement? It has got better. And I think it's got better as more foreign companies have invested in the country. And that has helped. It's not great across the board, but the businesses we own, we're confident that they have great governance. And in terms of the valuations there, again, historically, because of that prospect, the demographics was quite a rich market. How does it, again, the US is sort of the rich market these days.

24:06How does it compare? It has been relatively expensive within the region, and that's really why India has underperformed a little bit over the last year or so. And having been overweight India throughout 2023, we went neutral to slightly underweight in the beginning of 2024, early 2024, and we've stayed there since. And so the equity market has derated a little bit. The currency has been relatively weak compared to other currencies in the region. But I think we're now reaching the point where it's starting to look more interesting again. And I imagine that going forward, we're more likely to add to India than take money out.

24:46Let's talk about Australia. And in particular, I think I'm right in saying a lot of your exposure or a big part of it is towards commodity companies, both energy and gold. What's the case for Australia in particular, but specifically for gold at the moment? I think we're at a stage where it would be irresponsible not to have exposure to gold in any portfolio. Although it's gone up a lot in US dollar terms, that's really a reflection of the US dollar falling and other currencies falling against gold. and we can see that central banks around the world are much more receptive to owning gold and savers generally are willing to own gold.

25:33And over millennia, it has served its purpose as a store of value. And I expect that to continue. Other things will come and go. Bitcoin is having a bit of a sell-off at the moment. Who knows whether Bitcoin has got legs, but it's up to people in 500 years' time to decide whether or not Bitcoin can work long term. But gold has been around for so long, and I can see with budget deficits as high as they are and no let up in that, and so probable debasement to come with monetary policy generally being weak in many countries and an expectation that we'll have loose monetary policy, so low or possibly negative real interest rates for much of the foreseeable future.

26:24I can completely understand why gold has done what it's done and is likely to go further. Even if it doesn't go further, At current spot prices, many gold companies are hugely profitable. Their free cash flow generation is enormous, allowing them to either raise their share buyback programs or pay higher dividends or think about expansion organically or inorganically. So we have two large cap gold miners, accounts for just over 8%, probably 8.5 % now of the fund. And that is a key overweight as well as tech. I think those two sectors right now are still great places to be. Sort of yin and yang sectors.

27:09A little bit. Yeah, one could argue. And when you see gold rip as much as it has this year, I mean, you said it's offset of the dollar. I mean, but the dollar hasn't fallen 40%. It has in gold terms. Well, in gold terms, it has, if you put it that way. But I mean, I guess my question is, if it is a store of value, does it not worry you that it could fall as fast as it's risen in next year? And does that then not really do its job in the portfolio, I guess is my question. Look, we have seen some volatility recently, and nothing goes up in a straight line. and so I think if you have exposure to gold you've got to accept, embrace that volatility if it falls 5 % in a day you can't be overly concerned about that because it is going to be more volatile than some other asset classes but I do expect the trend to be higher for as long as we're in this period where monetary policy is loose.

28:17And I think because of the state of government finances, we're still going to be there for some time, particularly the US and the likely appointment of a chair of the Federal Reserve who is going to lean towards even looser monetary policy.

28:39As we start to sort of wrap up, we love getting people's advice, but I want to kind of pause on your career moves as well for a moment, because you mentioned the top, the fund now, and I know you're a small team, so it's an incredible position to be in, is over£2 billion, asset management, so close to$3 billion perhaps as a strategy. You did decide to take a big gamble when you left Newton 10 or so years ago. The strategy then got to what size? Well, it peaked at 8.2 billion US dollars in August 2014. And so when you weighed up, you didn't go out on your own, you joined Jupiter, but you moved in a way that was a smaller team, much more your own man within a different company.

29:31How tough a decision was that? It wasn't a difficult decision. I'm sure when other people move jobs, it's often not down to one single reason. There's always a combination of reasons. So I had reasons for leaving Newton, and then I had other reasons for joining Jupiter as opposed to going somewhere else. What I love about Jupiter is there is no house view. So the investors, we're free to think and invest as we see fit for our clients, given the remits of our strategies. That works really well for me. So I have a franchise within a business and I love that. So it's a great place for me to be as an investor.