Daily Management Review

Cheap Labour Isn't The Only Advantage Of Asia, Whether It's China, India, Or Japan - KKR Claims


Cheap Labour Isn't The Only Advantage Of Asia, Whether It's China, India, Or Japan - KKR Claims
Cheap Labour was formerly Asia's competitive advantage. According to the heads of global and Asia macro at KKR, industrial services now give this region an advantage over China, India, or Japan.
The private equity behemoth claimed it covers logistics, waste management, and data centres. "We believe that this story has both an internal and an external component."
Henry H. McVey, the chief investment officer of KKR Balance Sheet in New York, recently travelled to Singapore, China, and Japan and came to that investing conclusion. He oversees asset allocation and global macro for KKR. Singapore-based Frances Lim, managing director and head of asset allocation for Asia, travelled as well.
“The bid for infrastructure and logistics could accelerate even more meaningfully, we believe, in key markets such as India, China, Indonesia, the Philippines, Vietnam and even Japan,” the KKR report said.
According to the research, 20% of KKR's balance sheet is committed to Asia, a region that is going through a longer-term transition that would require more fixed investment.
Japan has hosted some of the company's largest announced deals over the past two years, despite the fact that the company doesn't break out allocations by nation. This involves a $2 billion purchase of a real estate manager funded by Mitsubishi in the spring of 2022.
“I think there are two big megathemes in Japan,” KKR’s McVey said in an interview Thursday. “One is this automation and industrialization, there’s a true capex cycle that’s going on in Japan that we haven’t seen in some time.”
In a speech given in New York last month, Japanese Prime Minister Fumio Kishida noted that domestic investment in his country is expected to surpass all previous records this year with more than 100 trillion yen ($673.58 billion).
“If that creates productivity, it’s going to allow them to drive wage increases which is something we haven’t had for some time,” McVey said. He expects Japan is exiting deflation.
The corporate reform that is increasing shareholder returns, according to McVey, is the other significant development in Japan.
After years of subpar growth, Japan has this year become a popular destination for foreign investors over concerns about China. American billionaire Warren Buffett visited Japan in April to announce new stakes in significant Japanese businesses.
In March, KKR announced that it had successfully acquired Hitachi Transport System, a logistics firm that specialises in supply chains and has now changed its name to Logisteed. This year, KKR also announced that it had acquired the Hyatt Regency Tokyo as part of a deal with Gaw Capital Partners, marking its first hotel investment in Japan.
“Japan remains a ‘must own’ country, we believe,” the KKR note said, adding that “Japan is a great story that is not trading at a full price.”
According to KKR, one of the biggest private equity firms in the world, its managed assets as of June 30 were $519 billion.
Even though McVey and Lim's most recent trip did not include a stop in India, they claimed in their jointly written report that their conversations with business leaders reaffirmed a strong investment case.
The report noted that India's public capital expenditure has increased by 200% over the past four years even as exports are rapidly increasing.
“There’s really finally some investment in infrastructure and that’s leading to, one, greater productivity, but two, it’s helping on the inflation front and it’s helping on the economic growth,” McVey said. He noted that in emerging markets, opportunities to benefit from rising GDP per capita trends are often more accessible in private rather than capital markets.
On Wednesday, KKR announced the opening of a new office in Gurugram. Nisha Awasthi, formerly of BlackRock, has been named managing director, and by early 2024, 150 additional workers are expected to work there.
The addition of a northern Indian office complements one already located in Mumbai. Beijing, Hong Kong, Seoul, Shanghai, Singapore, Sydney, and Tokyo are among the other Asia-Pacific locations for KKR.
McVey claimed that his most recent journey to India took place in 2019, while Lim and they composed their note in October after their third trip to China this year.
“Overall, growth in the country appears to be bottoming,” they said, noting the firm maintains a 4.5% real GDP growth forecast for China next year, along with 1.9% inflation.
KKR reported having around $6 billion invested in China in July.
Understanding how the economy is changing amid the pressure from the shrinking real estate sector was one of McVey's major findings from his most recent trip to China.
“There’s a transition going on that may be not fully appreciated,” he said. He pointed out that China’s digital economy and push for decarbonization may only represent 20% of the country’s GDP today, but they are growing by nearly 40% a year.
He has been a frequent visitor to Asia since 1995 and has worked in the finance sector for more than three decades.
According to him, the main changes during that time included increased global rivalry in addition to stronger monetary policy intervention and global integration. "There are political agendas everywhere I go, and we should be aware of them. It shouldn't deter us from investing, in my opinion.
However, it takes time for opportunities in emerging trends like automation to materialise.
“It’s an evolution, not a revolution,” McVey said of the situation in Japan, where his team’s research has found a one-time labor surplus is now gone.