Asian region regains investor confidence after sharp falls, supported by continuing growth and Chinese fiscal stimulus boosting sector’s economy
The IMA Asia Pacific ex Japan sector has returned to favour with investors as the region’s stock markets rebound strongly from the sharp falls seen during the financial crisis.
Driven by the continual growth in Asian economies, the region has also been boosted by the Chinese government’s huge fiscal stimulus, which supported its manufacturing and export sectors.
In July, Asia ex Japan was one of the highest-selling IMA sectors, with sales net retail sales of £250.7m second only to the £ Corporate Bond classification.
First State’s Asia Pacific Leaders and Asia Pacific funds, managed by Angus Tulloch, are among the top performers in the sector.
The Asia Pacific Leaders vehicle has returned 152.4% over five years to 7 September, according to Morningstar, ranking it fifth out of 53 funds. Tulloch’s Asia Pacific fund is up 149.4% over the period, with both comfortably outperforming the average 107.7% sector rise.
Over three years, Asia Pacific Leaders is up 64.7%, while Asia Pacific is 59.7% higher.
Tulloch attributes the outperformance to his conservative approach, which carries a natural bias towards strong franchises, able to consistently generate predictable earnings growth.
“We have also avoided cyclicals and instead favoured well-managed consumer-related companies. These brand-focused franchises have shown some immunity to the global economic downturn,” Tulloch says.
He believes the funds have also benefited from the increasing appetite for risk, which was boosted by government intervention globally.
“Asia has been a significant beneficiary. Financials have performed well, with holdings in Swire Pacific being a notable contributor to both funds.
“Energy has done well due to a strong oil price, which has helped our position in Woodside Petroleum.”
Tulloch intends to remain cautiously positioned despite the increased confidence in the global economy. He believes deleveraging of governments and consumers in the West will lead to more subdued demand in the future.
“Such high levels of quantitative easing makes us worried about inflation rearing its head at some point in the future at a time when economies may still be fragile,” Tulloch says.
“As such, we maintain a large position in two gold companies, Newcrest and Lihir, and more than half of the portfolio is invested in consumer-related companies that should be relatively immune from problems in the West.”
The manager believes investment in Asian firms offering quality in terms of management, business franchise and financial structure, will deliver positive returns over the long term.
Long-term positives include demographics and high savings ratios.
Looking ahead, Tulloch is relatively cautious at the moment, believing there is little upside at current valuations.
“Markets are discounting a rapid return to the favourable conditions of strong global economic growth prevailing before the recent financial crisis.
“However, they are not anticipating the possibility of a pick-up in inflation as a result of quantitative easing,” he says.
Tulloch describes the extent and pace of the market rebound as “astonishing”, but believes a further correction during the autumn is likely.
“Given the attraction of global equities dividend yields relative to cash, combined with our pessimistic outlook on corporate earnings, we are focusing particularly on companies offering good sustainable distributions,” he adds.
Allan Lui’s Fidelity South East Asia fund is the top sector performer over five years, up 172%.
Lui says equity markets in Asia have outperformed other global indices since the start of 2009, as investors became optimistic about the recovery and analysts raise corporate earnings forecasts.
He says these were the reasons for the rise in stock valuations.
“Going forward, investors will closely monitor corporate earnings growth and compare it against market expectations,” Lui says.
Lui believes the Fidelity South East Asia portfolio is well positioned to take advantage of healthy domestic demand and a recovery in the global economy.
Key overweights include consumer discretionary, along with real estate, banking and diversified financials sectors. He is also bullish on selected information technology stocks, on expected pick-up in global demand.
“The fund owns less than benchmark in the telecoms sector due to unattractive valuation and better investment opportunities elsewhere,” Lui says.
“Our strong proprietary research and bottom-up stock selection approach should prove particularly rewarding for us in the current market environment.”
Samantha Ho’s Invesco Perpetual Hong Kong & China fund is up 60.3% over three years, ranking it seventh in the peer group.
The manager believes there are attractive opportunities within the energy and materials sectors, with the vehicle overweight in both areas.
“In our view, the longer term prospects for these companies are not currently reflected in their share prices,” Ho says.
Ho has increased exposure to financials over recent months, believing improving economic fundamentals and strong loan growth should support the sector. In contrast, exposure to the insurance sector has been reduced as valuations become more expensive.
“We have reduced exposure to utilities, as the more defensive nature of the sector means it is likely to underperform in a more positive market environment, and as such we sought exposure to those sectors with stronger growth potential,” Ho adds.
Schroder Asian Alpha Plus, launched in November 2007, is up 20.2% over 12 months, against an average increase of 14%.
Manager Matthew Dobbs says: “There has been a bit of a correction in cyclicals in China as authorities warn banks about engaging in speculative activity and there is concern the country is looking to slow its growth.
“However, there is no need for them to do this as inflation is low and exports are under pressure.
“We are therefore looking to add back to China having reduced our allocation earlier in the summer while taking some profits in Korea, which has recovered strongly.”
