Richland Asia Absolute Return Fund, the flagship fund of Richland Capital Management, is estimated to have been up around 9.8% in 2010. We spoke to firm’s managing director, Alex Au, about prospects for 2011.
What are the key issues confronting equities this year?
I think visibility of global stock markets will remain low in 2011. On one hand, the real economy will still be haunted by high fiscal deficit and unemployment; on the other hand, equity markets will be supported by flooded liquidity. Under this backdrop, our strategy will remain to be nimble and focus on liquid names.
What will be the effect of QE2?
The QE2 by the Fed will keep interest rates low. That makes equities look cheap if you compare dividend yield to bond yield. However, inflation will continue to be the major concern in China and policy overhang will be the main factor affecting market direction. There will likely be a few times of interest rate hike and credit control. As soon as investors see inflation being contained, the market will start to rally.
Risk appetite in emerging markets should remain good. We will strategically adjust our net market exposure according to our view on inflation.
How about China?
We saw trading turnover in China's A-share market go to an all-time high recently. This is probably due to the tightening measures in the property market. Hot money needs to find a home and with a reasonable valuation at the current level, the A-share market is set to benefit. I think hot money will eventually spill over to Hong Kong and potentially other parts of Asia. As a result, retail investors will account for a bigger share of market turnover. That should create some mis-pricing opportunities. Taking advantage of this, we will increase our arbitrage and relative value trading strategies.
Lastly, China is set to increase domestic consumption in the contribution of its GDP as it only accounts for less than 40% of GDP compared to over 60% in the US. If you look at health-care spending, it only accounts for 4% of GDP in China versus over 10% in the US and parts of Europe. We will focus on the pharmaceutical, consumer discretionary especially luxury products, food and beverage and resources sectors.
What other aspects of local markets will evolve in 2011?
Stock exchanges across the region are keen to bring in foreign companies for local listing. For instance, Hong Kong may introduce Brazilian companies for HDR listing, and Taiwan continues to encourage TDR listing. We think higher retail participation will help these dual listings. This is an area we will closely monitor to see if there are any arbitrage opportunities.
What is your currency outlook?
We also see Asian currencies continuing to appreciate. The RMB should steadily appreciate by 5% in 2011 and that will be a good theme for investment. We like sectors with cost in foreign currencies but revenue in RMB; paper and airlines, for example. RMB appreciation also makes assets in HK look cheap. More and more mainland Chinese will go shopping in Hong Kong. They are buying properties, watches, jewellery and even nappies and food. So, both Hong Kong landlords and retailers will benefit.