Asian companies in a better position than Western peers in rising interest rate environment

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Listed Asian companies are in a much better position than their counterparts in Western countries in the prevailing interest rate scenario, according to a CLSA report.

The report divides companies across global markets into two categories: “Haves” and “Have Nots”. “Haves” are companies with low gearing and net cash balance sheets, while “Have Nots” are those with net debt balance and high gearing.

The benefit for “Haves” is the opportunity to earn extra interest and boost net profit, while on the other hand, “Have Nots” are faced with high interest costs that strain their profitability.

According to the CLSA report, the Asian markets are predominately “Haves” while Western markets like the US are a mix of “Haves” and “Have Nots”.

Asia’s (ex-Japan) net gearing (debt + total equity) at 20% is lower than that of the US and Europe, which have a gearing of more than 60%. Additionally, stocks in Asia with a market cap of greater than $30 billion are net cash while the US companies have a net debt of $12.5 trillion and above.

In a world of higher interest rates, the “Haves”, CLSA says, are earning extra interest and boosting net profit while the “Have Nots” are facing higher interest costs, which detract from their net profit.

According to CLSA’s Chief Strategist Alex Redman, interest rates in emerging markets are “turning down” while US companies are facing a worsening of the already existing 68-percent interest increase, as corporates start to refinance higher value debt for longer periods of time.

Asia’s ‘Atoms’ and ‘Bits’

While companies in Asia have a lower gearing overall, the market finds itself further scattered with a mix of “Atoms” and “Bits”, according to the CLSA report.

Entrepreneur and venture capitalist, Peter Thiel had once said that “You can invest in companies that deal in Bits or companies that deal in Atoms”. In simple terms, “Bits” refers to tech-heavy companies while “Atoms” refers to asset-heavy companies.

According to CLSA analysis, there are around 100 stocks under coverage that averaged a revenue growth of greater than 20 percent for the 2020-2024F period. Of this, 24 percent were “Bits” while “Atoms” made up the remaining 76 percent, with most of them performing well. This includes big “Atom” companies in the Chinese EV space or “Bit” stocks such as Alibaba.

The CLSA report quotes investment analysis company Lykeion, which says the prevailing investment theme of the last 20 years has mostly been in tech. “Because of this, many have paid less attention to the atoms side of the investment spectrum. But those who did have been handsomely rewarded,” the report says.

Key takeaways:

  • Asian companies are in a better position than Western peers in the prevailing interest rate scenario.
  • Asian companies have lower gearing and more net cash than Western companies.
  • The “Atoms” side of the market in Asia is performing well, with many companies delivering strong revenue growth.
  • Investors who have paid attention to the “Atoms” side of the market have been rewarded.

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