Barings' Ng swaps industrials for Asian banks

Barings' head of Asian equities Colin Ng is rotating his portfolio away from industrials and petro-chemical stocks that took a hit in the summer sell-off, and has been adding to banks.

The £52m Baring Eastern trust fell to the bottom quartile of the Asia Pacific ex Japan sector over the three months to 30 September, losing 20.9% compared to the sector average fall of 18.4%, according to Morningstar.

Hong Kong-based Ng said the fund had been in recovery mode in terms of performance since he joined the firm in 2009 but global cyclical stocks took a hit during the market turmoil.

"We had a tough time in September but we are catching up in October. Industrials were amongst the worst performers as a substantial portion is export driven and investors anticipated slower demand from global customers.

"We have reduced some of our exposure to petro-chemical companies and industrials in favour of some of the banks in China and Indonesia which are offering good entry prices now after the correction."

He added banks remain "pretty healthy" after learning from their mistakes in the Asian financial crisis in the late 1990s.

"Chinese banks have been prudent in their lending and loan to deposit ratios have actually declined to 75%, compared to 100% during the Asian crisis."

Despite concerns the number of non-performing loans will rise to trillions of renminbi, Ng said not only does China have the reserves to cope with this, but banks have only 5%-10% of their balance sheets exposed to this area.

Indonesian banks is another area he favours due to their strong net interest margins and political stability in the region. He has recently increased exposure to 5.3% which is overweight the MSCI Asia ex Japan index of around 4%.

Technology is another major theme on the fund, resulting in the portfolio having large exposure to Korea. Tech is 19.2% of the fund, compared to 15.9% of the index while 24.5% of the fund is invested in Korea.

"Valuations are very close to crisis levels and we have seen Korean corporates continue to be very dominant in global market shares. Over the last two or three years Asian tech companies have been spending more on their research and development strategy to focus on branding as they believe this will lead to higher margins.

"Samsung Electronics is now the number one memory chips, smartphone and LED TV producer, in an area which used to be dominated by Japanese brands such as Nokia and Sony."

Ng also dismisses concerns that China is in for a hard landing and suggests valuations are close to the bottom.

"If you were to ask me are there signs of a hard landing, based on the current data, the answer is no. We are much closer to the low of 2008 in terms of earnings, and it could go further if you believe the eurozone crisis will get worse than the US financials crisis of 2008.

"But the difference in Asia is the governments have other options, they can issue bonds for example, and the Chinese economy is still likely to grow by at least 7% next year which is a lot more compared to developed economies."