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Governance separating returns
Corporate governance is attracting increasing attention, we believe for all the
wrong reasons. Decades of decreasing protectionism and increasing
computerisation have seen the rise of globally interconnected capital markets
that are highly efficient at mobilising capital to appealing opportunities. This
„honey pot‟ will attract both the legitimate entrepreneur seeking funding for
investments aiming to make a return as well as those who are merely seeking
funding. Couple this with the internet, which has put the ability to distribute ideas
widely into the hands of the masses, and you have a recipe for increasing „fog‟
around the issue – the end result being a need to have a clear framework and
ability to uncover the facts (typically from a deeper understanding of the
companies‟ operations on the ground).
The FT today highlights the jurisdictional arbitrage that makes it hard to rely on
prior held norms (“Problems flagged up”, FT, July 5th). The greatest risk, it says,
is where a company is listed in one jurisdiction but assets are substantially in
another jurisdiction (often achieved practically via a back-door listing).
Our ESG specialist Aimee Kaye has produced a body of reports that have
pointed out two important factors, namely, accounting standards have not
adapted to a corporate socially responsible minded environment, and event
study based research suggests that the market is less attentive to positive ESG
practices than to negative issues. In March of this year, our Quant team, led by
Gurvinder Brar, produced a report that attempted to quantify the divergence of
good versus poor corporate governance – this report found that the cost of
equity spread was 300 basis points, hence the greatest gains from following
good corporate governance accrue over time to be meaningful. >> Read Report
Stepping into the furnace of the current debate, Jake Lynch in our Shanghai
office has screened his universe for “focussed strategies, teams that combine
old-timers and new blood from MNCs, robust ERP systems, longstanding quality
auditors and long track records. MNCs or private equity on the Board of
Directors are another plus”. This has resulted in a 120-page report on the issue!
Jake concludes that the market has painted too many companies with the same
brush; his top picks include: Home Product Center (HMPRO TB), Dah Chong
Hong (1828 HK), Man Wah (1999 HK) and ARA Asset Management (ARA SP).
>> Read Report
Highlights
 Peter Eadon-Clarke sees evidence of Japan‟s investors re-entering the
market, with net buying by brokers turning positive last week.
 Jason Gammel continues to believe Galp (GALP PL) offers the best
leverage to the Brazilian pre-salt where news flow continues to surprise.
 Tuck Yin Soong says CapitaMalls Asia (CMA SP) remains attractive with
healthy traffic and tenant sales growth in its retail malls.
 Patti Tomaitrichitr says the recent Thai election result is unlikely to erase the
rising headwinds facing the property sector.