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DBS AM says inflation and growth threats are transitory

Investment Outlook Series: Kam Yoke Meng, head of Asian equities at DBS Asset Management, favours Singapore and Taiwan, and says investors shouldn't give up on China.
This is part of an AsianInvestor series on the investment outlook of fund managers with Asian portfolios.

Kam Yoke Meng joined DBS Asset Management in December 2007 as head of Asian equities. Based in Singapore, Kam has 16 years of fund management experience including the time he spent with OCBC Asset Management and Lion Capital Management. He has extensive experience in managing portfolios with mandates that range from absolute return to benchmarked strategies relating to Asia Pacific ex-Japan, Asean and other single country portfolios. He is also responsible for making portfolio allocation decisions and overseeing the investment process.

One of the largest asset management companies in Singapore and Southeast Asia, DBS Asset Management and its associated companies manage around S$25 billion ($18.5 billion) in assets for retail, private and institutional investors.

What are the biggest opportunities that you see in the markets you are responsible for in the coming 12 months? How are you preparing to take advantage of those opportunities?

Kam: We are at the cusp of another major transformation in Asian economies that could further elevate their standing in global financial market in the years to come.

We view the current threat of more inflation and less growth in the Asian economies as transitory. It is an opportune time for Asian economies to restructure their economies for the next major leap. For many years now, public subsidies and environmental issues have distorted cost structures in Asia. By addressing these issues now, we could be looking at a more efficient allocation of resources over the long term.

While Asia may lose some competitiveness in the near term, such restructuring will be positive in the long term as it will propel Asia to the world stage. Many Asian countries have already started to acquire global companies even before the onslaught of current economic problems. This trend will continue as the weakness in the financial systems in US and Europe is likely to throw up interesting acquisition opportunities. The fundamentals of Asian economies today are in better shape than ever to deal with oil prices and inflation.

How different or similar is your 12-month investment outlook now compared to the start of this year?

The recovery of Asian stock markets is now delayed as a result of the continuing rise in oil prices, which has a major impact on liquidity and inflation. Policy makers have been behind the curve, but they are now sitting up. At the beginning of this year, we were more worried about growth. Now we are more worried about inflation. With higher inflation going forward, cost of equities will be higher and this will hurt valuation.

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

We have turned more defensive in our stock picking and have higher cash levels. Thailand has been reduced from an overweight earlier in the year as politics and inflation started to hurt the stock market. We will focus increasingly on sector and individual stock pickings as performance will be increasingly differentiated. We have reduced our overall risk to better enable us to invest as opportunities arise going forward.

What are your favoured markets in Asia?

Global inflation dominates the near-term outlook for Asian economies and stock markets. The unravelling of food and energy subsidies is likely to rekindle domestic inflation and keep price pressures high until next year. Within the region, we are biased towards countries with stronger policy options to deal with oil prices and inflation.

We still like Singapore and Taiwan.

Singapore is our highest conviction overweight at this moment. The strong Singapore dollar has moderated the effect of high import prices while the solid fiscal position helps cushion the escalating cost of living for the needy. The lack of price controls also means that as her neighbours struggle to keep a lid on inflation in the aftermath of subsidy removal, Singapore should be looking at lower inflation rates in the second half of the year, as the base effect of the last GST (goods and services tax) hike, and the lagged effect of housing price adjustments normalizes.

We 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. Increasing domestic confidence has the potential to boost the performance of stock market, which has suffered a de-rating in recent years.

We also have a non-consensus positive view on China. It is too late to give up on China as valuation is now more reasonable, food inflation is easing and the authorities have ample policy flexibility to deal with their economic problems. Over the medium-term, we still see China prevailing as a growth market relative to its regional peers.

What are the markets you are going to steer clear of in the coming year?

We have avoided Malaysia since the beginning of this year. Heightened political uncertainty and related policy risks continue to keep us away for now. We are also avoiding markets with poor liquidity in current market conditions such as the Philippines.

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

Inflation and oil prices û because they can further put pressure on policy rates and liquidity.

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

Also inflation and oil prices. We are being vigilant about companies' margin pressures, avoiding companies vulnerable to rising rates and staying with liquid assets.
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