Ayaz Ebrahim is the CEO for Asia-Pacific at Halbis Capital Management. He is responsible for the fund house's equity and fixed income investments in Asia ex-Japan. He is also the lead fund manager for the fund house's regional equity funds. Halbis, which manages over $26 billion in assets in Asia, is the active fundamental investment specialist of HSBC Global Asset Management.
Ebrahim shares with AsianInvestor his views about Asian equities.
Looking at a one-year period or beyond, what is your outlook for Asian equities? How has your view of Asian equities changed, if at all, since the end of 2008 when investor sentiment was generally gloomier?
Ebrahim: Our fundamental view on the region has not changed, and we remain positive on the Asia story. At the end of last year, our major concerns were about the US and European economies and financial systems. This is something Asian investors must follow closely given the high correlation between US and regional markets during periods of uncertainty and volatility. However, we were still confident that Asia could recover given its relatively strong fundamentals.
Certainly, Asia has not been spared from the global slowdown, but its problems are less systematic in nature than those in Europe and the US. The banking system is broadly solvent, levels corporate and personal leverage are lower, and, by and large, governments have more fiscal and monetary flexibility.
Governments have certainly displayed the will to apply this policy flexibility in helping their economies cope with the collapse in external demand. Given its large share of regional GDP, the signs of the economic stimulus programmes gaining traction in China are particularly encouraging.
We have believed for some time that the key driver of future economic growth in Asia should come from domestic consumption, and have been investing to take advantage of this long-term structural change. The global financial crisis has made this transition all the more vital.
What are the biggest opportunities that you see in the coming 12 months?
Last time we spoke about investing for deleveraging and dividends, and Asian small-caps as interesting strategies.
For investors worried about continued uncertainty and looking for more predictable equity investments, we would still recommend focusing on quality companies with the balance sheet and earnings strength to pay sustainable dividends. Dividends have proved to be much less volatile than earnings during past crises and make this an attractive strategy for investors who believe that there are still significant risks to earnings in the global economy.
Small-caps have outperformed large-caps during the rally over the last few weeks, and should continue to benefit from returning risk appetite as the economy begins to recover.
Overall, we believe the market is showing signs of stabilisation that should allow bottom-up investors such as ourselves to focus once again on picking the right stocks. In the last few months of turbulence, investors have focused more on shifting between defensive and cyclical sectors rather than assessing the fundamentals of the companies themselves. Our philosophy and process is geared towards bottom-up, fundamental investing, and we believe this will regain importance in this environment.
What do you think of Asian equities valuations at the moment?
The valuations profile of Asian equities has changed quite dramatically in the past six months. Back in October, we were talking about prices eight times 2009 earnings. As at early May, we are closer to 17 times 2009 P/E. Valuations have become much more expensive with the drastic downward revision of earnings followed by the rapid increase in prices that began in early March. If we look forward to 2010 valuations, the market is trading at 13 times earnings which, depending on where one thinks the cycle is at, appears to be more reasonable. As prices have risen, and 2010 downward revisions have either slowed down or reversed, the risk is on earnings surprising on the downside. The question to be asking is, how visible are future earnings given continued uncertainty in the global economy?
What are the biggest challenges that you expect to face?
We are bottom-up, fundamental stock pickers. The biggest challenge for us in this kind of environment is dealing with technical distortions in the market, caused by high liquidity, short-covering and volatility. These factors may delay the process of the market recognising mispricings and can mean that we underperform during periods when stock prices are driven more by momentum and liquidity than fundamentals.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months, whether because of the crisis, the swine flu, or other reasons?
Our allocations to sector or country are the result of our stock-level decisions. However, broadly speaking we did move overweight India stocks where we feel company earnings can be supported by domestic demand and where falling commodity prices have relieved some of the pressure on the country's balance of payments. Although given the recent rally in India, we have been taking profit where we believe valuations are becoming stretched.
We recently increased our positions in selected Indonesian companies that can benefit from domestic demand, and we feel the country is in a stronger position politically than other Southeast Asian countries.
We continue to be overweight China, which so far has confirmed its ability to use considerable fiscal spending power and policy flexibility to combat the slowdown.
Given our view that there are still significant risks to earnings in the current global demand context, we remain cautious on markets like Korea and Taiwan. However, we have been looking to take advantage of selected opportunities, for example in Korea where selected companies can take advantage of the weak currency to win market share, or in Taiwan with the continued improvement in cross-strait relations. However, both markets have rallied significantly, and we need to look at valuations carefully in assessing these opportunities.
Southeast Asian markets -- with the possible exception of Indonesia -- continue to be hampered by political issues, particularly in Thailand, and this looks likely to continue in the near term. Nevertheless, they have lagged North Asian markets during the recent rally, so there are opportunities there as well.
What are your market weightings within an Asia ex-Japan equities portfolio?
The following weightings refer specifically to the HSBC Global Investment Funds -- Asia ex-Japan Equity portfolio:
- China - 28%
- Hong Kong - 11%
- India - 10%
- Indonesia - 3%
- Korea - 20%
- Malaysia - 3%
- Philippines - 0.5%
- Singapore - 4%
- Taiwan - 16%
- Thailand - 1.5%
- Cash - 3%
Many fund managers are very bullish on China, citing reasons that include its Rmb4 trillion stimulus package. Do you believe this hugely positive outlook on China shares is well-deserved?
Given the huge contraction in global demand, government policy is likely to remain the key short-term driver for markets. China's ability to stimulate the economy is unparalleled, and data over the last couple of months suggest that government measures are gaining traction. It is understandable, therefore, for managers to be bullish on China. However, it is becoming a crowded trade, and not all companies will benefit from government policy in a sustainable way. It is key, therefore, to look closely at each company's operating model and strategy, and to be disciplined in assessing valuations. In addition, the extreme stimulus measures being employed, and the rapid loan growth in the first quarter this year may create risks in the medium-term that investors should be aware of.
How do you seek exposure to Chinese companies?
We have a number of China strategies to invest in red chips, H-shares, B-shares and P-chips. For A-shares, we can invest in the market via equity linked instruments and the QFII quota of HSBC Global Asset Management.
Which sectors do you expect to outperform and underperform in the next 12 months?
We are a fundamental bottom-up up investment firm so we do not take sector bets, but look for mispriced companies where we think the market is underestimating intrinsic value. The rally in the last few months has benefited cyclical sectors, such as technology or consumer discretionary stocks at the expense of defensive plays, such as telecoms or utilities, which had outperformed when risk-aversion was at its highest.
Over the next few months, it seems unlikely we will see significant negative economic data, and this should support cyclical sectors. However, while economic data points have been positive, concerns remain on the long term health of the global economy and rising share prices have made many cyclical sectors expensive. To justify these valuations, earnings have to materialise, but there remains limited clarity over earnings numbers, especially for 2010. If this starts to be apparent, defensive sectors are likely to recover as investors turn back to prioritising earnings stability.
What is your investment criteria? Has your criteria changed since the onset of the global financial crisis?
The core of our process has not changed. Our approach is to invest for quality and growth characteristics, where we believe companies are committed to increasing shareholder value. We perform rigorous, in-depth analysis to identify mispriced companies with strong fundamentals. We believe the global financial crisis has emphasised the importance of investing in quality companies, with the balance sheet strength to cope in a period of deleveraging, and the industry position and strategy to ensure solid earnings streams and cash flows.