Asian investors are missing out on buying opportunities close to home as they fret unnecessarily about distant crises in the US and eurozone, say managers.
With volatility a palpable concern, Mark te Riele, deputy CEO for Asia pacific at BNP Paribas Investment Partners, notes that Asian investors are shunning risk assets and steering clear of mutual funds entirely, largely over fears of a eurozone breakup (see slide 1).
Although the above slide has a time-horizon that stops in mid-2011, Te Riele confirms the lines continue on in the same fashion.
But it was a totally different story in the Asian financial crisis of 1997/8, he notes, when investors were prepared to take on risk and invest in mutual funds despite fear of contagion (see slide 2).
“It is strange that investors are putting so much emphasis on a crisis which is happening in another continent," states Te Riele. "Any macroeconomic analysis of a worst-case scenario would show the impact [of a breakup] on Asia would be relatively limited."
He argues the media is playing a big role in fostering fear. "The euro crisis is on the front page every day, it has become a self-fulfilling prophecy," he says. "It contributes to these things being more correlated than they should be."
Strategic Insight data on Asian retail investors shows a recovery in appetite in the second quarter, with inflow of $25 billion into equity funds compared with outflow of $17 billion for the previous three months.
But Strategic notes that the majority of second-quarter inflow, at close to $19 billion, was ploughed into ETF launches in China and Japan.
Te Riele confirms the only real risk assets he sees investors buying now are China ETFs. But he and other investment specialists are saying now is a good time to invest in Chinese equities more actively.
He points out an irony that the US equity market is at a four-year high while China’s equivalent is at a three-year low. "If you compare the two economies, it does not make sense," he notes. "If you zoom into the China story, we feel there is a lot of value."
In a briefing last week, private bank Coutts also highlighted opportunities in Chinese equities, based both on valuation dynamics and on the flexibility of policymakers to drive growth in the economy.
Coutts is advising investors to take profits on assets which have performed well and to buy those which look cheap.
Gary Dugan, Coutts’ Asia CIO, is optimistic that investors can get a double-digit return out of Chinese equities over the next six months. He notes, too, that the bank is compiling a basket of Japanese stocks with a P/E multiple of 5 and a yield of 5%.
"We think there are things that are cheap and may get cheaper because the markets can dip further," he says. "I am confident you would make money from buying Chinese equities today."
Coutts sees value in the construction sector, in particular infrastructure and cement, as a new generation of central and provincial leaders take the stage.
Ryan Tsai, senior investment strategist, points to Chongqing, which has just announced plans to invest Rmb1.5 trillion in key industrial sectors in the next three years.
He sees further opportunities once the central government reshuffle has been completed next year. "This is a time when we think the government will be a bit more aggressive [on spending]," he says.
But Tsai is cautious on China's consumer sector, noting the CSI 300 Consumer Discretionary Index has lost almost 27% in the past year. He expects further headwinds as the incoming government leadership strives to address a widening income gap.
But he sees potential in Korean equities, notably in the tech and auto sectors, on the understanding that such stocks benefit from broader emerging market exposure. The Kospi 200 Consumer Discretionary Sector Index has gained close to 10% this year.
Another point made by Te Riele is that Asian investors still tend to buy global fixed income and global emerging market debt products rather than Asia-centric bonds.
He notes that BNP Paribas IP is seeking to diversify its range of Asian fixed income funds, potentially by introducing a corporate bond strategy and a local currency option.
In fact, data from Australian bank ANZ shows that investors in Hong Kong, Singapore and South Korea had increased the share of Asian equities in a global equities bucket to 35.7% by 2010, from 23.6% in 2001.
Similarly, Asean nations had increased exposure to Asian debt to 50.9% of a long-term bond portfolio, from 16.9% in 2001; and 70.2% in a short-term debt portfolio, from 15.2% over the same period.
But these figures include direct investment into single securities, while Te Riele is purely referring to lack of investment in the mutual fund universe.
For its part, ANZ sees opportunities in Australian bonds, with 10-year government bond yields of about 3.38% (compared with 1.75% for the US equivalent). It also notes inflows into the Philippines' sovereign debt market, with the country upgraded to BB+ by Standard and Poor’s last month.
ANZ also sees opportunities in Asian currency markets, especially Singapore dollars, Korean won and Malaysian ringgit.