The jury is still out on whether Chinese and Taiwanese share prices will continue to slide and by how much, but fund managers polled by AsianInvestor are certainly keeping the faith in those markets.

Earlier this month, AsianInvestor sought 15 fund managers of Asian portfolios to participate in an ongoing Investment Outlook Series.

Out of those 15 fund managers, seven said China and Taiwan were among their favoured markets within an Asia ex-Japan equities portfolio. Other markets that figured high on the preferred list were Singapore and Korea.

On the flipside, Malaysia and India are the markets that fund managers are most bearish about.

The participants in the series included fund managers from Aberdeen Asset Management, AMP Capital Investors, Batterymarch Financial Management, DBS Asset Management, Deutsche Asset Management, F&C Investments, Fidelity Investment Management, Halbis, Invesco, Mirae Asset Management, Pictet Asset Management, Prudential Asset Management, Schroder Investment Management, Templeton Emerging Markets Fund, and Threadneedle Asset Management.

Combined, these fund houses manage more than $2.5 trillion worldwide and more than $380 billion in Asian equities (some of the respondents declined to reveal their assets under management).

ChinaÆs economy and TaiwanÆs politics

ChinaÆs long-term economic growth story is still on top of the list of reasons why nearly half the fund managers surveyed by AsianInvestor are not abandoning their bullish outlook for China-related shares.

They are concerned about the short-term risks to China resulting from inflation and external shocks, and are taking measures to mitigate those risks. However, they believe that staying invested in China will eventually pay off. Most of them also believe itÆs too late to pull out of mainland-related shares anyway because doing so now would mean taking a hit with huge losses while at the same time losing out of the market turnaround when it eventually comes.

ôChinaÆs economy has enjoyed substantial growth in the last several years, which can be credited to its young demographic profile, solid expansion founded on industrialisation and urbanisation, and support from prudent economic policies,ö says Paul Chan, InvescoÆs Hong Kong-based CIO for Asia ex-Japan. ôCorporate earnings have been boosted by surging sales volume, productivity gains and large-scale restructuring of the traditionally inefficient state sector.ö

While ChinaÆs equities market ôovershot during last two years on massive speculationö, Chan believes the market has now returned to reasonable valuations.

Kam Yoke Meng, Singapore-based head of Asian equities at DBS Asset Management, adds it is too late to give up on China.

ôValuation is now more reasonable, food inflation is easing and the authorities have ample policy flexibility to deal with their economic problems,ö Kam says. ôOver the medium-term, we still see China prevailing as a growth market relative to its regional peers.ö

Much of the optimism on Taiwan, meanwhile, rests on expectations that the new government led by the Kuomintang (KMT) or Nationalist Party will be able to improve ties with China. That, in turn, is expected to result in a stronger economy and stock market. The connection to China has been surfacing more frequently since the victory of the KMT in the March presidential elections in Taiwan. President Ma Ying-jeou has offered to reopen dialogue with China, which claims the island as its territory, while promising to maintain self-rule and a distinct international profile.

ôWe retain a positive view on the Taiwan market, in view of improved cross-strait relations with China and a stable political environment, with the promise of more pro-economy and pro-China policies,ö says DBS Asset ManagementÆs Kam. ôIncreasing domestic confidence has the potential to boost the performance of stock market, which has suffered a de-rating in recent years.ö

Kannan Venkataramani, Singapore-based investment director for Asian equities ex-Japan at Prudential Asset Management, says improved cross-strait relations and increased infrastructure spending are two major drivers that could help boost TaiwanÆs domestic economy at a time when the export sector battles a global slowdown. He adds that TaiwanÆs valuations are attractive and the market offers good dividend yields.

Singapore is favoured by some managers because its strong currency has moderated the effect of high import prices; its solid fiscal position has helped cushion the escalating costs of living; it is relatively resilient amid milder inflationary pressures; and it is benefiting from the generally good quality of listed companies, high regulatory standards, and overall transparency of the market.

Korea is favoured by some because of the attractive valuations and strong growth potential of select companies. There are some, however, who are underweight in Korea because they feel the economy and stock market is too exposed to the global economy, and there are risks of earnings downgrades.

Bearish over Malaysia and India

Malaysia and India top the list of markets that have fallen out of favour for diverse reasons.

Fund managers are concerned over the heightened political uncertainty and the related policy risks in Malaysia.

Anwar Ibrahim, MalaysiaÆs opposition leader, was arrested last week and later released on bail over allegations that he sodomised a 23-year-old male aide. This is the second time such an accusation has brought against him since 1998. The same charge 10 years ago was eventually struck down by Malaysia's Supreme Court, but only after Anwar served six years in prison on a related abuse of power charge.

Anwar, who has denied any wrongdoing, has said that this latest charge is politically motivated and aimed at suppressing the increasing popularity of the opposition. His three-party alliance had a good showing in elections in March, winning 82 seats in the 222-member Parliament

ôMalaysia has political issues that will probably worsen and dampen sentiment going forward,ö says Boston-based Ray Prasad, Batterymarch Financial ManagementÆs lead Asian portfolio manager.

In the case of India, fund managers are worried over the possibility of further monetary tightening, it dependence on imports, and its relatively weak fiscal position.

ôWe are negative on India given the current macroeconomic situation,ö says David MacKenzie, Hong Kong-based product manager for Asia equities ex-Japan at Schroder Investment Management. ôThe economy is highly dependent on oil imports. The sharp rise in inflation has resulted in monetary tightening. Loan growth has subsequently slowed down.ö

While long-term trends such as urbanisation and the rising middle-income class are intact, Mackenzie notes that IndiaÆs stock market is facing strong headwinds from twin deficits and a risk of further capital outflows.

Sectors-wise, the fund managers are biased in varying degrees towards financials, commodities, infrastructure, energy, resources, materials, telecommunications, and consumer staples. They are generally avoiding consumer discretionaries, industrials, brokerages, auto and auto component companies.

Inflation on their minds

Not surprisingly, most of the fund managers rank inflation and its impact on the domestic policies as the biggest challenge to investing in Asia ex-Japan at the moment and in the months to come.

ôThe balance between growth and inflation will be a challenge to most policy makers in this region,ö says Andrew Tan, Singapore-based lead fund manager at Deutsche Asset Management. ôThe situation gets compounded by policy changes brought on by rising energy and food prices. In some instances, we are seeing tightening measures and lifting of price controls in economies which are net importers of oil and have fuel subsidization policies in place.ö

Other challenges cited by the fund managers are heightened the US-led global economic slowdown; uncertainty and volatility in global markets; oil prices; the possibility of overheating of the economies in China and India; and political risks in certain markets.