Edmond de Rothschild Asset Management aims to build on its China franchise, before expanding across the region, says Bruno Vanier, chief investment officer for global equities at the firm in Paris.
"We also want to sell our US and European expertise here, and have ideas for new investment products to offer," he told AsianInvestor while in Hong Kong last week. "For example, we're happy to do some products based on small- and mid-cap equities in China -- and also elsewhere in Asia."
Hong Kong-based general manager Yi Tang, who manages the China portfolios, says that since the Hong Kong office opened at the end of 2007, the firm has already seen increased investments in our China strategies from both non-Asian and regional investors, including bigger inflows from pension funds. "Being on the ground here gives us more credibility," he adds.
The firm has begun to receive some investments from large institutions in Asia, and is looking at partnerships with pension consultants and pension funds. "In some countries in the region, there is open bidding [for mandates], and we look forward to participating in that," says Bryan Chen, Hong Kong-based marketing manager for Asia.
In addition, Asian issues are increasingly contributing to Edmond de Rothschild AM's convertible bond (CB) offering. Around 23% of the firm's €200 million global CB fund is currently invested in Asia, says Vanier. The firm launched this fund in July, following the success of its long-running €900 million European CB fund. It is also considering launching an emerging-market CB fund. "That's something we need to look at," he says. "It would be a good idea."
The fund manager runs a total global AUM of €12 billion, of which €2 billion is in diversified/balanced funds and €10 billion in pure equity and convertible bond funds, the latter comprising €1 billion. The firm has around €750 million invested in China equities through three funds, of which one invests predominantly in China A-shares.
As for investment prospects in China and elsewhere in the region, Vanier has some interesting views. He is, not surprisingly given the market environment at the time, rather more upbeat than when AsianInvestor last interviewed him in March.
"[Despite the huge rally this year,] China is still a very interesting market for us," says Vanier. He cites the strong rise across emerging-market currencies, and notes that the only two that haven't strengthened are the Hong Kong dollar and the renminbi.
Assets based on the mainland but denominated in Hong Kong dollars look very attractive, he adds. "We see a lot of potential in China, a likely strong recovery in earnings," says Vanier. "Earnings here have shifted to positive sooner than in developed markets. Growth for next year is continuously revised up. So valuations still look attractive, especially following the small correction in August, he adds. "That has given us a chance to increase weightings in this part of the world."
Tang says Chinese small and mid-caps have had a good run and are no longer as cheap as they were at the start of 2009. As a result, he is now focusing on "large-cap laggards", which includes some of the integrated oil players, rail construction and related stocks, and export-related names, such as port operators.
Tang sees value, as he believes "too much bad news has been priced in". For example, in the telecoms sector, fear of over-investment in 3G rollout and price wars has been a drag on stock prices, but might be exaggerated. Yet these companies are posting 10-12x price-earnings ratios with no growth priced in, he adds, as against much higher 20x PE levels in the small-cap sector.
Edmond de Rothschild AM also likes Chinese insurance firms. They are a good play on increasing consumer revenues and are still attractively priced relative to their growth prospects.
Beyond China, Vanier sees the Korean won as very undervalued. "It collapsed in the late part of last year and has recovered since, but we still see an easy 10% to be made on the won," he says. "Korean exporters are very competitive at this stage, and some of the domestic companies look very attractive, such as AmorePacific."
Following the market consolidation in India in October, Edmond de Rothschild AM also increased its weighting in this market. "Some of the big Indian companies have very strong potential," says Vanier. "Companies doing work for Western financial institutions will benefit if we see an improvement in the banking sector in the US, as is likely after the 2008/2009 consolidation of the sector." He cites tech service providers Tata Consultancy Services and Infosys as the type of firms likely to take advantage.
The asset manager also likes Indonesia, given its strong export relationship with China and large, young domestic market.
Meanwhile, Vanier feels Japan may be a better investment prospect than people think, citing what he feels may be a good short-term contrarian play. "If the yen weakens some time in 2010, we should see local equities performing very well, particularly some of the local exporters such as Fanuc and Kubota," he says. "After their last capital increase, the banks should also perform."
Outside Asia, he says, "we have a long-term bullish view on Brazil". Vanier feels the long-term domestic story is still present, despite the very strong performance of the market and its currency year-to-date. "The measures they have taken to prevent hot inflows may be painful in the short term," he adds, "but the Brazilian authorities want to avoid a situation which may lead to over-investment and subsequently to a crisis similar to the 1998 Asian crisis."
Vanier is referring to the government's move in October to impose a 2% tax on all foreign investment inflows to prevent a further rise in the real that could derail the country's economic recovery. However, some cynics have suggested the tax is an effort to raise revenue to fund a growing budget deficit.
Meanwhile, Russia may have a very poor corporate governance record, says Vanier, "but as a stock-picker we have to go beyond that". "It can be quite interesting to buy companies that have poor corporate governance but are improving. That's likely to mean their valuations will go up. Sometimes you need to be dynamic in your analysis."
However, Vanier adds that he is less interested in East European countries, which he views as small markets without a lot of potential.