| Richard
Newell
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It
is worth pointing out that there are some excellent single
country fund managers in the Asian region. You wouldn’t
know it to look at the pure performance numbers, which only
show what a rough ride you tend to get if you hold these funds
for the long term. This highlights the fundamental problem
for investors wanting single country exposure. If we take Korea
as a good example, the Kospi Index went from around 570 in
October 2001 to 940 in April 2002. And then, while the sell-side
analysts were all saying it was going up to 1100 and more,
the Kospi came all the way back to 570 in October 2002. This
goes a long way to explaining why regional Asian managers often
take a highly active asset allocation approach. No matter how
good the single country fund manager is, the fund will always
be a hostage to the gyrations of the market, when a small number
of stocks dominate and the movements are that extreme. Asset
allocation is therefore crucial in Asian portfolios and the
decisions are probably best left to regional experts.
While current valuations in Korea look attractive, the market
still awaits the catalyst to drive stock prices higher.
All eyes are currently on China, which continues to benefit
from huge inflows of foreign investment. Its economy is expected
to outperform the rest of Asia by a wide margin in 2003, with
the momentum of reform expected to remain strong after the
recent change of leadership. Heavy investment in Hong Kong
and China by Asia managers is a factor of the sheer size of
these markets, and of their major stocks being so high profile.
The only concern here is that, once again, foreign money will
be flowing in just as valuations are looking stretched. However,
the market is expanding fast and transparency issues are being
addressed.
The momentum for change is gathering pace and mainstream fund
managers will have to work harder to satisfy investor demand
for consistent returns from their China portfolios. Closet
Hang Seng Index huggers may find it tough going from here.
There is the likelihood of further downward earnings revision
in Hong Kong and with an economy so heavily dependent on external
trade, and with a pegged currency, the outlook is not hugely
favourable at the moment. Confidence is low, on the basis that
China holds all the cards and will seek to put the interests
of the mainland before those of the SAR. How long Hong Kong
can remain the hub for Greater China is an open question.
Anecdotal evidence from fund managers indicates that China
remains a risky place to invest for the uninitiated, but with
good opportunities for the more experienced. Many of China's
listed companies are not particularly well-managed and operate
in highly competitive industries, which makes careful stock
selection a necessity. Fund managers are finding it necessary
to look at a larger pool of companies, moving down the cap
scale, in order to take advantage of the Chinese growth story.
And there is still a high incidence of corruption in the Chinese
securities market, which those involved accept goes with the
territory. ARN’s Chris Wong has recently sold out of
a major holding in China Brilliance. He says, “We have
long held the stock as it is destined to be BMW’s joint
venture partner in China. BMW is about to start local production
with a target annual production of 30,000. Given the speed
of wealth accumulation in China, there is certainly no shortage
of demand across the country. What triggered our complete exit
from the stock is news that a legal dispute between the ex-chairman
and the provincial government could be turning more ugly.
“Reportedly, the ex-chairman has been fronting the majority
shareholding on behalf of a third party. It was reported on
the financial news that the provincial government could be
siphoning off assets from the listed vehicle to nullify any
economic reason to pursue the legal dispute. Our first response
was to challenge how that can happen without contravening the
Stock Exchange listing rules of Hong Kong. Our second thought
was that we decided to exit. That is in keeping with our philosophy
on investing in China. Our move could be wrong but we do not
want to run the risk of being proved right.”
The performance of many of the funds in the Asian region has
been increasingly erratic and one of the discernible trends
in Hong Kong and Singapore has been the amount of fund restructuring
that has gone on to try and improve this situation. There have
been a number of manager changes and, of course, quite a few
asset management firms have shifted their investment teams
from Asia to the UK, or have consolidated in one centre rather
than be present in two or three.
This is only significant if the move has served to disrupt
the continuity of the fund’s management. For better or
worse, at the same time as asset managers were consolidating,
no one was much interested in buying into Asian markets.
Invesco’s Alfred Ho observes that a lot of global investors
have lost patience with Asia as an asset class, understandably
given the performance on a risk/return basis over the last
ten years. However, he is of the view that liquidity is improving
steadily and that the Asian markets will provide a measure
of outperformance in coming years.
London based manager Sloane Robinson agrees with this. It doesn’t
expect major world markets to advance significantly in the
foreseeable future, but the Asian markets “are perfect
for a self-funded and sustainable period of strong economic
growth, resembling that of the mid-late 1980's.” A significant
de-coupling from US markets has occurred and as a net creditor
to the international financial community, emerging Asia would
see no adverse effects from currency devaluation. “In
recent months, we have experienced the start of this de-coupling
as the markets recognise the positive dynamics of certain of
these economies. We believe this feature of the emerging Asian
markets is sustainable,” says SR.
Since the crisis that accounted for Thailand in 1995, there
has been a two or even three speed Asia. That situation is
only now unwinding itself as Thailand and Malaysia in particular,
regain the favour of international fund managers. The Thai
market was a star performer in late 2002 early 2003, despite
the temporary high risk premium after the Bali bombing. Thailand’s
strong macro fundamentals, good results from banks and finance
companies, a reduction in local interest rates and new rules
to cap credit card charges have underpinned the market. ARN’s
Chris Wong has backed his belief in Thailand’s recovery
with a high exposure to Thai stocks within his fund. This is
not a knee-jerk reaction but a considered response after several
years during which Wong has neglected the market: “our
decision is based on a wave of indication by leading banks
to refinance a big chunk of their outstanding high cost capital
raised at the low point of the Thai banking crises back in
1998 as a lifeline for the banks to stay solvent. The high
cost capital came about by convincing depositors at that time
to convert bank deposits into interest bearing note with a
built-in mechanism of jacking up coupon interest once the bank
starts to turn profitable. Our conclusion then was you need
to look no further in deciding when banking profits will start
to turn for the better. As the banking sector
started to report solid meaningful profit in the fourth quarter
of 2002, the marginal cost of funds for the hybrid capital
is due to climb to 11% versus the prevailing lending rate of
6.75%. Hoping our decision is right, this would complete the
full cycle of our call on Thai banks dating back to 1995.”
Looking forward, the China factor is going to be a major determinant
for which countries run on the fast track. Singapore is playing
the role of safe haven and has been able to outperform as a
result. Says Ho: “The ability of the Singapore market
to perform has been made easier because its currency is not
pegged to the US Dollar, which permits the authorities more
discretion over monetary policy”.
Having said that it’s important for a regional manager
to be taking an active stance, relative exposure is an issue
for the investor. One fund manager will have a natural disposition
towards Thailand and Malaysia for example, while another might
have as much as 50% of an Asian portfolio exposed to China
and Hong Kong combined.
The region’s increased reliance on the global electronics
cycle is a double-edged sword and implies greater volatility
going forward, although we may at least have reached the point
of maximum pain. As the producer of choice for chips, handsets
and PCs, Asia should experience strong volume demand going
forward. More than ever, it is crucial to look closely at the
Asian specialist managers to see which ones are best positioned
to make money in this most interesting and diverse of regions.
Copyright 2003 Richard Newell |
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| Copyright 2003-2007
Richard Newell. All rights reserved. |
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