Shares of Standard Chartered (LSE: STAN) Prudential (LSE: PRU) and Burberry (LSE: BRBY) have fallen heavily over the past year. All three have significant exposure to China and the wider Asia region, and are victims of negative investor sentiment as economic growth in China has slowed.
The question is: have they become unmissable bargains or are their shares set to continue performing poorly?
China conundrum
China’s economy grew by 6.9% in 2015, according to the country’s official figures. This was the slowest growth posted in a quarter of a century, and marked a continuation of the deceleration seen in recent years.
Furthermore, most economists using alternative growth indicators that are less susceptible to political pressure have put China’s growth at 4% to 6%. Uber-sceptics reckon there was minimal growth or even contraction, based on the so-called ‘Li Keqiang Index’ of electricity consumption, rail freight volume, and bank lending.
The wide variation comes down to differing opinions on the most appropriate indicators to use at a time when China’s economy is transitioning from state-led investment and manufacturing to services and consumption. It is, of course, the latter drivers — rather than those of the Li Keqiang Index — that are most relevant to the prospects for Standard Chartered, Prudential and Burberry.
Turnaround story
Standard Chartered was formed in 1969, with the merger of the Chartered Bank of India, Australia and China, and Standard Bank of British South Africa. Standard Chartered boomed as China and emerging markets boomed, but has suffered recently as those economies have gone off the boil, and some of the bank’s lending and other activities during the good times no longer look so clever.
New management is focused on tightening risk controls, improving cost efficiency and investing in “areas in which we have a long-term competitive advantage”. I think belief in this advantage is crucial to the investment case, and I go along with the bank’s claim that “our franchise is hard to replicate and we remain well positioned to support wealth creation in Asia, Africa and the Middle East”.
With the shares more than 75% down from their peak, and trading at less than half the value of tangible net assets, Standard Chartered appears an attractive turnaround story for the long term.
Optimistic insurer
Prudential’s shares have fallen by 30% in less than a year. This appears to be a case of short-term sentiment very much eclipsing the longer-term prospects. In fact, even at the moment, demand for Prudential’s protection and savings products from Asia’s growing middle class seems to be holding up well.
The company said in November: “We remain optimistic about the outlook across the Group, particularly in Asia where the compelling long-term fundamentals of the region are unchanged”. Trading at just 10.3 times forecast 2016 earnings, with a well-covered 3.5% prospective dividend yield, Prudential looks very attractively valued.
Timeless fashion
Iconic British fashion house Burberry has also seen its shares fall 30% from their peak. The company, which does significant business in Asia, noted an “impact on our revenue of the challenging external environment for the Chinese luxury consumer” when announcing its half-year results in November, but a Q3 update in January spoke of an “improvement on Q2 as mainland China returned to growth”, although Hong Kong remained challenging.
Clearly, the environment hasn’t been easy for Burberry of late, and management has cautiously noted that “the outlook for demand in luxury is uncertain” in 2016/17. The company trades on 18 times forecast earnings, but has commanded an even higher premium in the past. I expect it to do so again in more benign times, which could make this purveyor of timeless fashion a good buy right now.