Why Value Partners chairman Cheah feels the ringgit is undervalued
HONG Kong-based Value Partners Group chairman and co-chief investment officer Datuk Seri Cheah Cheng Hye, also known as the Warren Buffett of Asia, is a former Star journalist who became one of the most influential fund managers in Asia.
Today, Value Partners, which he co-founded, has around US$14bil (RM62bil) worth of assets under management.
For the uninitiated, Cheah was born in Penang in 1954 and started working in The Star at the age of 17 as a newspaper folder before subsequently becoming a reporter. He left Malaysia for Hong Kong in 1974.
He was a journalist for 17 years, including in The Star, Asiaweek, Far Eastern Economic Review and The Wall Street Journal (Asian Edition).
It was while he was a financial journalist that Cheah realised he had a passion for investment. He taught himself accounting and investment through books.
Cheah felt that being good in finance was a necessity to perform well in his job as a financial journalist.
He changed his career in 1989, joining Morgan Grenfell in Hong Kong as head of research in Hong Kong and China.
In 1993, he started his own business by founding Value Partners in Hong Kong with his partner V-Nee Yeh, with less than US$5mil (RM22.12mil) under management. Today, Value Partners is one of Hong Kong’s biggest success stories.
Cheah is one of the pioneers in institutional investing in China-related stocks and in mid and small stocks.
In an interview with StarBizWeek, Cheah shares his thoughts on the Malaysian market, China, his investing strategy, and life in general, Below are excerpts of the interview.
On markets and investing
So you are getting more bullish on Malaysia?
In the last three years, the ringgit has declined by more than 25% and this has greatly affected our interest in Malaysian stocks. This is because even if you make money in the market, you can lose from the currency.
Starting from this year, the ringgit has shown signs of revitalising. So, this has aroused my interest. I am thinking of putting more money back into the country. Until recently, our only investments in Malaysia have primarily been in plantations, because palm oil is an internationally traded commodity quoted in US dollars.
So, palm oil has in fact benefited and balanced from a weak currency. But now I see not only palm oil but crude oil too, which is another component that is very important to Malaysia, stabilising and improving. On top of which we are beginning to see some weakness in the US dollar against all currencies. So, we would like to come back. We also know that in Malaysia, the reform of Government-linked companies (GLCs) is progressing.
This is good for the competitiveness of the country. I am not a currency expert, but I have read analysis that suggests that long-term value of the ringgit ought to be between RM3.80 and RM4.10. So, we have some way to go. At least a 10% appreciation to go. We only don’t know when it’s going to happen. But I think the ingredients are in place.
What are those ingredients?
Improving commodity prices and the perception that there is now more improvements in political stability in the country.
There are more aggressive moves made to reform the corporate sector, especially among the GLCs. There are measures to make Malaysia more competitive, even in things as simple as setting the retail oil price. While the retailers may not like it, we feel that this makes the country more competitive. We also believe the general election will be held later this year. And as far as I can remember, being someone who was born and grew up here, the market tends to go up before the election. Don’t ask me why. But that’s the way it is. I am also including that as a positive factor for Malaysia.
There still are some risks in Malaysia. For example, Malaysia is not particularly cheap despite its strong underperformance. If I recall, it is trading at a price earnings ratio of 16 times. That is not a symptom of a cheap market.
If you buy the Malaysian market in general, you may end up with a basket of moderately expensive big-caps. I believe one reason why stocks here are not cheap is because it is very well supported by the local institutions and pension funds. They buy all the time. They continuously buy no matter what the investment climate.
What is your market outlook for 2017?
2017 is looking good. For the professional investor, the problem is tactical - there is a shortage of growth. Economies are not growing fast enough. I think the global economy will be growing by some 2.5% a year. But lately, there has been some improvement. China and India are today responsible for more than half the growth of the global economy. I think Malaysia can probably grow 4.5% this year.
That’s way above the developed nations. So, investors are attracted to this growth the way bees are to honey. So, the outlook for 2017 tactically has improved. The long era of the US dollar dominance, where it is stronger and we get scared to buy because of our weakening currencies, is reversing, or at least stabilising.
The Chinese yuan is also beginning to stabilise. The Chinese economy will probably grow 6.5% this year, which is decent. There were many fears people had when Donald Trump was elected, such as fears that he would do negative things to global trade. Well, I don’t see that happening, at least for 2017.
So what is your style of investing?
We are stockpickers. We look at individual stocks.
Investing is about common sense. Now, businesses are listed on the stock market. However, you cannot treat them just like a business, as the stock market is made up of millions of players who make illogical and emotional choices.
So, there are many methods being used - momentum, looking at certain psychological levels, top down, bottom up .... I still go back to value investing. For this, you need to be very patient. Value always outperforms in the long term.
I don’t believe in speculating. Because it is my job to make money consistently over time. This is my career.
What are some of the trends that you are looking at, moving forward?
The global economic rebalancing will continue. As the population ages and technology improves, a lot of exciting things happening will be in IT, healthcare and the continuity to educate our young people. So, we are very interested in these sectors. For education, we are interested in new types of education, such as those that adjust to a different type of economy.
We are also very interested in this great mountain of savings in the world. The Chinese nationals are the biggest savers in the world. To be precise, they have a savings rate of 46%, all of which is looking for a home to invest in. The Chinese have the money and they want to diversify. That is why you see housing bubbles happening in China.
They need to put their money somewhere. This gradual liberalisation of the Chinese economy is now happening and all that savings will have to go somewhere. There is a chance that some of that money is going to come over and they will need someone to manage it.
What is your opinion about Jack Ma being a personal adviser to Malaysia’s Digital Free Trade Zone?
That is for real. I personally know him, although not very well.
This guy has completely transformed Mainland China. If Malaysia really gives him an opportunity, it will be very positive. I am just as excited as you are. In China, not only has he supplied massive employment, he has also changed the way people think in terms of buying and selling things.
So, it is generally a transformational situation. I think Ma will affect Malaysia in making it more efficient, especially in terms of retailing. It may squeeze out some of the intermediaries. It may force Malaysians to think in a more technological way.
You fear that the next Global Financial Crisis may be happening soon?
My personal theory is that the unsustainable spending and the populist politics in many of the developed countries will bring about the next global financial crisis. Maybe one even worse than 2008. The non-stop printing of money, the very low interest rates kept for far too long, and a political system that is based on trying to make everyone as happy as possible all the time to secure re-election – well all this creates a society or system that is increasingly unsustainable.
We keep trying to push our problems to the future. So, I feel that the very stable global system we have lived in since World War 2, where the US provides stability to the world in many different ways, is coming to an end.
The Eastern and South-East Asian countries like Malaysia must find their own way.
In this sort of politically-driven environment, I feel that financial people like myself cannot do much. Politics is far more important than economics.
I don’t know when the next financial crisis will take place. I hope it doesn’t, But if it happens, we must be well prepared.
You mentioned that you see a trend of the US dollar weakening against other currencies despite the fact that the Federal Reserve is in the process of raising interest rates?
We think that over the next 12 to 18 months, there will be another three to four interest rate hikes. As the Fed governor has observed, they will be very cautious in pushing interest rates higher. They are very dovish. That is why when the interest rates were raised recently, the market went up, and not down. They are not willing to push so hard on the brakes. That is why the US dollar continues to decline even though the market expectation is for more interest rate hikes.
Amidst all the big talk, the underlying message from the Fed is that they are going to do it very softly and gently, and they don’t want the US dollar to go up a lot either. In fact, the Trump administration is quite interested in exploring competitiveness for the US. That can’t happen if the dollar is too strong.
It is not in anyone’s interest for the US dollar to be so strong. I would say that since the beginning of the year, emerging markets like Malaysia are beginning to show signs of outperformance. And fund managers like me who are terrified of underperformance will come back and keep looking. So performance brings more performance.
So the theme for this year is emerging markets?
I think so. Emerging markets are somewhat back in favour. And the fact that so many international funds have been almost totally out of Malaysia for three years, this is very bullish. If these foreign guys show even some small interest in buying Malaysia, there will be new buying power. So, we now harvesting a little bit of benefits from the situation of the last three to four years. We are expecting more foreign inflows into Malaysia.
When you evaluate a company, apart from the quantitative and valuation aspect, is there a particular dealbreaker that makes you decide against a company?
It is easier to talk about what is the greatest source of our mistakes. About one-third of our investment decisions turn out to be mistakes. The majority of those mistakes come from the wrong evaluation of human beings... We thought the management of a certain company was good or honest. Then we were wrong.
It is much easier to analyse numbers. It is all there in front of you. It is much easier to visit a factory and see the nature of the business and how it is doing. Human beings are very complicated. We have encountered cases where we trusted the human being, and he was not straightforward.
The dealbreaker is if we think we are wrong about the quality of management, then we should get out fast.
So you believe more in quantitative methods when buying stocks?
No, although we also use that for ourselves. Remember what I said about our formula for investing?
Its based on the 3Rs. The right business, the right people and the right price. The most difficult R is the right human being.
What is that one thing which can derail a person, particularly a fund manager’s success?
Ego. The disease of the asset management industry is ego. The moment you have an ego, and you are not humble anymore, that is your downfall. And it’s not just me saying it. It’s true consistently in any country in the world where fund management success makes some people think they are God because they are controlling so much money.
Once they have ego, they start making a huge number of mistakes almost immediately.
So for people like me, I believe in staying humble. Keep your feet on the ground and never forget where you came from. If you can remain humble no matter how successful you are, the world will be at your feet.
Are you tapping into big data to enhance your investing prowess?
Yes, it is one of many methods that we are using.
We have a good inhouse trading programme. It is very elaborate and developed through trial and error over many years. In a fund management company, it’s not just about the fund manager. It is about infrastructure and support, back office, legal compliance, human resource and IT. All these people have to be put together, and trained. Of the 220 people that work in Value Partners, only 70 are investment staff. The remainder are actually middle management and support staff.
We are one of the very few Asian brands who have this integrated vertical and horizontal model. Most Asian asset management houses cannot afford to have a back office and they outsource it. This integration has enabled me to do asset management on a very large scale. Because when we want to buy something or sell a fund, we have all the lawyers and back office people to support us. In Malaysia, there are no more than five companies with this similar sort of infrastructure. That is one of the key ingredients of success. You have the support staff to do what you say you want to do.
On life and going overseas
Is the grass greener on the other side?
I think the quality of life in Malaysia in general is very good. It is definitely better than many places in the world, and I have been to many places. The friendliness of the people, and a little money goes a long way here. It is easy to get around, there is convenience and there is space. The standard of housing here is very high, more than Malaysians realise.
But from a career point of view, especially during my time, there was very little chance to grow in Malaysia. You really had to go overseas to make it big.
For example in The Star which was my first job in Malaysia, I got to the position of acting chief sub-editor in 1974. I was the guy who put the paper to bed at night in Penang. And my salary was RM300 at that time. I asked the editor at that time to give me a RM50 payrise. My editor said “forget it”, so I left. I went to Hong Kong only because I wanted money. I couldn’t speak Cantonese or read Chinese, hence there was no incentive for me to go, and every incentive for me to stay.
How do you make Malaysia a more compelling place career wise here?
My observation of Malaysians working in Hong Kong is that they tend to stick too much together. They don’t tend to mix with people outside of the Malaysian community, so this limits their exposure and their choices. I think in the next 10 to 20 years, it will be very important to reform the Malaysian education system.
Put much more emphasis on the Chinese language, maybe on an equal bearing with the English language. I don’t think the government will have any objection to that. Our young people should be just as comfortable speaking the Chinese language as they are with the English language.
Will you come back to Malaysia?
Definitely. We are trying to find opportunities in Malaysia. To open an office in Malaysia and do business here. The market here is attractive and continues to grow. It is not a will, it is a when. We already opened an office in Singapore some two years ago. We have 11 people there. Opening our office in Malaysia is about thinking about the right format. Will it be a one-person office, or a full-fledged office or an acquisition? However, I am confident to say that we will probably open an office here in the near to medium term.
Who is your role model?
It has always been Warren Buffett. From the time I was a journalist, I read everything I could about Warren Buffett. Read all his shareholder newsletters and constantly try to think why he is so successful and tried to apply it to Asia.
It took me a long time to realise that some of his methods were more suitable for North America than our Asian markets. In the beginning, I was just copying him quite blindly. But in the 1990s, I started to adapt to suit our local conditions.
What more do you want to achieve for Value Partners?
I want to be among the pioneers in the whole world for producing high quality asset management products at a very affordable price and a low profit margin. If I can do that, then I will be very successful in my profession. That is my professional challenge. On succession planning, I want to make sure that I am replaceable. So I have various people, who will gradually take over and run the show. Right now I work seven days a week.
My life is just work and nothing else. But I want to gradually reduce this. So in the next three years, maybe I will slowly reduce the work week to four days a week. But I must admit that I have been talking this way for a few years and nothing happens. So let’s see.
Why are many of our young people moving overseas?
It’s not the country. It’s the career. People like me, a former Star journalist, I didn’t have much long-term planning. I just thought, oh the salary in Hong Kong is much higher, so I go. There is no feeling of “Oh this is Malaysia, hence I am being nationalistic”, nothing like that. It is just individual opportunity. So Malaysia has to create that opportunity where young people can feel that they can be a success here.
Are you concerned about the quality of talent in Malaysia?
No. Malaysia has one of the best talent pools. We have a long history of hiring Malaysians. The brains here are available at a very reasonable price and they are reasonably hungry. Malaysia is always one of the main places we look for. It’s a commercial decision, nothing to do with nationalism.
One of the reasons talents here are good is because they tend to have a very good college education – their parents have invested a lot in this area. Usually the Malaysian young person is quite willing to learn and at least moderately hungry. This is especially when they are overseas, they feel some pressure to show some results.
And one last observation of the Malaysian is that they are much more flexible than other nationalities. They can adapt to the employers request, whether its to work a bit longer or a bit tougher – they just take it.