Fidelity South East Asia manager Allan Liu shares his thoughts on Asian markets rebounding strongly in 2009
How do you see the current economic environment in South East Asia?
Broadly, South East Asia’s economic environment remains stable. Governments and central banks handled the global financial crisis well by implementing prompt and decisive measures to stimulate growth from internal sources and to compensate for a fall in exports. The results of a variety of measures, including large infrastructure spending, interest rate cuts and cash handouts have been encouraging.
Of course, countries with large domestic economies, such as China, India and Indonesia, fared better, but more encouragingly, Q2 GDP data suggests the pace of contraction has slowed in the rest of the region, including export-dependent economies such as Hong Kong, Malaysia, Singapore, South Korea and Taiwan.
Overall, industrial production has started to increase, unemployment rates seem to have bottomed out and retail sales are showing signs of a recovery.
Note that while the region did not face a credit crisis like most developed markets of the West, the global crisis had seen liquidity in Asia dry up. However, net foreign fund inflows have turned positive in the last five months and there has also been a sharp rise in new share issuance as companies have raised funds to strengthen their balance sheets and expand.
Given the region’s export-dependency, do you think the trend can last?
I think it can continue over the medium to long term. It is true Asia is dependent on exports to the US and Europe but their share of Asia’s total exports has been shrinking over the past 10 years.
In recent months, exports from key economies such as Singapore, China, Hong Kong, Korea and Taiwan appear to be bottoming.
Moreover, the region is in a better position to withstand the challenging environment than the West due to its large domestic market.
A large part of the population, particularly in large economies such as China, India and Indonesia, remained relatively unaffected by the global crisis and continued to consume.
In addition, most South East Asian countries have healthy trade balances and sizeable foreign exchange reserves, giving them more room for further fiscal and monetary policy stimulus.
What is more, the banking system is robust and the corporate sector is less indebted than the West.
How are these thoughts reflected in your portfolio?
The fund’s positioning at sector level is a result of bottom-up stock selection. However, I have positioned the fund to take advantage of the healthy domestic demand in the region and a global economic recovery.
Broadly, we are overweight consumer discretionary, financials and IT stocks. I also have a marginal overweight in industrials, given the increased infrastructure spending in the region.
Within financials, the fund holds larger-than-benchmark stakes in China Construction Bank, Wing Hang Bank and Bank Rakyat Indonesia.
The overweight in ITs is largely due to the holdings in domestic-focused firms such as China-based BYD and Tencent Holdings.
How has the fund performed in recent months?
The vehicle has outperformed its benchmark over all standard periods to end of September. In the past three and six months, the outperformance has largely come from stock selection within the IT and consumer discretionary sectors.
Among technology stocks, shares in BYD and Tencent Holdings contributed the most. Hyundai Mobis proved particularly rewarding from the discretionary space. In addition, the overweight in Indonesian coal-miner Bumi Resources and packaging and paper products manufacturer Nine Dragon Paper and Lee & Man Paper enhanced relative returns as they benefited from a recovery in demand.
Conversely, select holdings in the real estate and utilities sectors hampered performance.
What is your outlook for the region?
Asian equity markets should continue to outperform the developed world over the long term. Economic fundamentals remain strong and should support superior GDP growth rates due to a number of structural changes.
A healthy population growth and the trend towards urbanisation and industrialisation will require infrastructure development in urban and rural areas. Existing penetration levels of consumer and financial products remains low across the region and growing working age population and increasing affluence should drive consumption.
Low household debt levels and high savings rate also bodes well. In the near term, regional economies should benefit from lower interest rates compared with history.
Improved political environments in countries such as Indonesia, Thailand and Malaysia is another positive.
Corporate performance has improved and, in recent months, more companies have seen their earnings revised upwards than have faced a downgrade. However, there could be volatility in the near term.
Investors will closely monitor corporate earnings growth and compare it against market expectations. We must remember the global economy has not fully recovered from one of the worst financial crises in history.
