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ROCIM's Chang happy to stay long

Walter Chang of hedge fund ROCIM talks about the recent rally, likely shocks next year and why Asia ex-Japan ETFs may not be the best bet for 2010.

Hong Kong-based ROCIM launched its Asia Opportunity Fund in autumn 2007. The $30 million fund has an Asia ex-Japan long/short strategy. Investment director Walter Chang talks about his outlook for the coming months.

How is the fund performing?

We're up 43% year-to-date, and we were up 1% for the whole of 2008. Macro was the dominant factor in 2008 and we traded with a heavy macro overlay during that time and lowered gross and net positions substantially.

In 2009, we took more directional bets during the market recovery. It was not hard to find companies that are seeing a substantial recovery in earnings and are trading at a reasonable valuation.

What is your strategy in the next few months?

I'm happy to retain my net long position of about 70%. The thing I am looking most closely at currently is market valuation. On a price-earnings basis, MSCI Asia ex-Japan is trading about 10% above mean, and on a price-to-book basis is about average.

Historically, during the first year of recovery, markets usually trade up to this valuation and then stop, but I think we could see a further 5-10% upside from here due to ample liquidity and stronger-than-average earnings recovery. However, things will start to look quite expensive when the markets reach that level, and that will be time to start lowering our risk exposure substantially. If that doesn't happen, then I'll be happy to hold on to my position.

The rally in March and April was sector-driven; people buying into the stories of asset reflation, restocking and into the companies that could benefit from stimulus packages across Asia. By August and September, though, investors no longer traded broad sectors. They looked at individual companies in detail and re-rated those that can deliver outstanding results. The investment process became more bottom-up after that point.

If investors feel bullish though, why not just buy an exchange-traded fund (ETF) rather than your fund?

[ETFs have a lot] to do with timing. If an investor had invested with us since 1 January 2008, they would be up 44%. But if they had invested in a MSCI Asia ex-Japan ETF at the same time, they would be down 22%.

My view is that we will see more volatility in 2010, so if you go into an ETF now, you will probably end up next year with nothing. There will be more opportunities for stock pickers and market timers.

What market areas offer the best opportunities?

China consumption will continue to do well, but the problem there is that stocks have already run up during this year. I also like the oil sector. Oil has done little for the last few months and I think the future direction for oil is up. 

I like the alternative energy sector, but that is mitigated by high valuations at present and over-capacity in certain niches of that market, like solar energy.

Some Chinese financial institutions might come under some pressure and have 5-10% downside.

You said you weren't expecting a big exogenous shock soon. But if there was something looming, what might that be and what signs should we be looking for?

Although we do not expect a double-dip in the stock market, we believe there will be shocks next year. The obvious one looming is the unwinding of the dollar carry trade.

The signals to look out for are interest rates and inflation trend. The most prominent US number affecting this is unemployment. If the latter falls, that will be a good sign for the economy, but a bad sign for the markets. Eventually it will happen.

Valuation may also come under pressure during the second half of next year as earnings growth will suffer from a higher base. The market may use this as an excuse to correct if valuations remain high.

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