Aberdeen pursues likely post-crisis winners

Investment Outlook Series: Hugh Young, head of equities at Aberdeen Asset Management Asia, identifies companies with healthy balance sheets, dominant competitive positions, and domestic-oriented businesses.
This is the first part of an AsianInvestor series on the 2009 investment outlook of fund managers with Asian portfolios.

The first to share his views in this investment outlook series is Hugh Young, a Singapore-based managing director of Aberdeen Asset Management Asia, Aberdeen Group's headquarters in the region. He is group head of equities as well as a member of the executive committee responsible for the Aberdeen Group's day-to-day operations. He co-founded AberdeenÆs Singapore office in Asia in 1992, having been recruited in 1985 to manage Asian equities from London.

Aberdeen Asia employs more than 250 staff and has research and investment offices in Australia, Hong Kong, Japan, Malaysia, Singapore and Thailand, which Young oversees. The fund house manages more than $28 billion in Asia.

What are the biggest opportunities that you see in the coming 12 months?

Young: There will be winners and losers from the coming economic downturn. Companies that are highly geared or are overly dependent on the export sector will struggle. Other companies û those that have healthy balance sheets, dominant competitive positions or are more domestically oriented û will become stronger during the downturn, as rivals suffer. It is among this latter group that we see the biggest opportunities.

Examples of stocks we like include QBE Insurance, Oversea-Chinese Banking Corporation (OCBC), and Jardine Strategic Holdings.

QBE Insurance is one of AustraliaÆs leading general insurance and reinsurance companies. Its business is well diversified by both product and geography. It also has a good long-term track record of generating shareholder returns.

OCBC is a well-run Singaporean bank seeking to generate additional value for shareholders by restructuring assets and via regional expansion.

Jardine Strategic is a Singapore-listed conglomerate with interests across the region spanning property and retail.

How has the global financial crisis affected the way you manage your portfolios?

Our investment principles have not changed. Indeed, we feel that the current global crisis has only reinforced the merits of our investing style.

What is the biggest lesson you have learned from the US credit crisis?

We do not chase market trends, but instead focus on balance sheets in order to identify companies that offer margins of safety, and have the ability to grow revenue and market share. Such attributes have become even more crucial given the global downturn and the negative outlook for earnings.

Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?

Our market and sector positions are not actively managed, but are the passive result of our stock holdings. In recent months, we have only sold two holdings from our regional funds, Maybank and Kookmin Bank. These sales did not reflect a more negative stance towards Asian banks, but were made for more stock specific reasons.

Proceeds were used to top up holdings across the board, but notable mentions would include Rio Tinto, which we felt was well-supported by the BHP Billiton bid, and Standard Chartered Bank, a very well-managed bank with good regional exposure.

What are your favoured markets in Asia?

We do not operate an active country allocation. As a result of its stock picking, countries in which we are overweight relative to the benchmark include Singapore, India and Hong Kong.

Although Singapore is a mature economy, it boasts some of the best Asian companies with strong balance sheets and conservative management. Many of these companies are more regional plays than they are plays on the Singapore economy, which is fairly small and is limited in terms of growth prospects. The country has a consistent and rational economic policy, and a high level of transparency, providing us with further comfort when investing in companies listed in Singapore. Companies are also increasing focus on shareholder value and embarking on corporate restructuring.

Although India is facing a period of consolidation as foreign liquidity contracts, its financial, IT, pharmaceutical and consumer sectors remain attractive. Earnings multiples are at the high end of regional benchmarks, but earnings potential remains among AsiaÆs strongest. While the countryÆs bureaucracy has tended to hold back economic development at times, many of IndiaÆs companies have learnt how to deal with this.

Hong Kong offers listed companies that have diversified, regional business activities, particularly those that provide an exposure to China, albeit with better standards of accounting and transparency.

What markets are you bearish over?

China remains one of the most exciting growth stories in Asia, but the positive macro environment is not always reflected at the corporate level. From a quality standpoint, we prefer to gain exposure via Chinese companies listed in Hong Kong, where standards of accounting and transparency are far better.

Korea is a relatively mature economy with well-known global brands such as Samsung and Hyundai. The key problem has been the domination by the chaebols, which are involved in too many businesses. Moves by the government to prevent hostile takeovers of domestic companies have also raised concerns.

What are your market weightings within an Asia ex-Japan equities portfolio?

China û Underweight
Hong Kong û Overweight
India û Overweight
Indonesia û Overweight
Korea û Underweight
Malaysia û Overweight
Pakistan û Underweight
Philippines û Overweight
Singapore û Overweight
Sri Lanka û Overweight
Taiwan û Underweight
Thailand û Overweight
Vietnam û N/A

The market weightings are based on the Aberdeen Global Asia-Pacific Equity Fund. Its benchmark is the MSCI AC Asia Pacific ex-Japan Index.

Which sectors do you expect to outperform in the coming year?

Market volatility is likely to continue in the coming year as the credit crisis runs its course. We expect sectors like utilities, healthcare and consumer staples to be able to withstand the current economic headwinds better than others given their defensive qualities.

Having said that, these are extraordinarily difficult times, which have seen bellwethers for the global economy hurt by the slowdown. More importantly, we are less concerned with identifying sectors that will outperform than looking for companies that will survive the crisis and emerge stronger.

Which sectors do you expect to underperform?

Although it is now accepted that demand from Western economies for AsiaÆs exports will continue to fall substantially in the coming months, and related stocks have already fallen substantially, we feel there is still further downside. While resource companies might hold up reasonably well if China is successful in its attempts to boost its domestic economy, producers of manufactured goods destined for export markets will continue to suffer.

What are the main challenges that you expect to face in the coming 12 months?

Global rescue plans put in place to contain the credit crisis may not be able to prevent fresh points of stress from surfacing. In addition, the crisis has had negative ramifications for the real economy, with much of the developed world already in recession. In the US, problems in the banking and auto industries are likely to spread to other sectors. Export-dependent Asian economies, already facing job losses of their own, have been hit by the slowdown in the West. Concerns over the length and depth of the downturn will likely dominate market sentiment and contribute to higher risk premiums as well as increased risk aversion in emerging markets.

What are the main risks of investing in Asia at the moment? How are you managing those risks?

Although AsiaÆs financial systems have continued to operate, its economies and markets are highly sensitive to events in the developed world. Furthermore, a number of Asian companies have had exposure to failed financial institutions in the West. For most markets, the fundamental problem is one of very tight credit. Problems in lending are affecting all areas of economic activity. As recession starts to bite, corporate earnings will continue to be revised downward.

That said, we feel that our portfolios are well-positioned. Our holdings have good management teams and strong balance sheets, which will enable them to survive the current crisis. Most of our Asian bank holdings, too, are mainly engaged in straightforward deposit-taking and lending, with little exposure to the toxic assets that have hurt Western banks.
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