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PidcockÆs team manages around $3 billion of Asia-specific equity funds and another $3.5 billion worth of Asian portfolios for global products. The firm identifies driving themes or trends, which form the basis for bottom-up security selection, usually for highly concentrated portfolios. For Asian portfolios, energy supply is a leading theme that will create winners and losers.
He says that the challenges many Asian companies face over problems of securing energy outweigh any short-term issues around the credit crunch or inflation. He compares inflation fears to wild fires, prone to flare-ups, which are important and potentially damaging û but have already taken place. The credit crunch has prompted his team to further underweight financials, but it was a sector to which the team had already low exposure going into the summer of 2007.
ôCredit issues can be inflated away, if governments choose to do so,ö Pidcock says. ôBut you canÆt print oil.ö
Energy will only become a bigger issue, he reckons, noting that oil prices should continue to trend upward. The average price for a barrel of oil in 2007 was $72, a figure that has so far risen to $111 year-to-date; and Pidcock expects the figure will rise again in 2009. This will lead to more M&A activity in energy-related sectors, particularly Australian resource companies.
But he argues that energy fears, which are a global problem, make Asian companies relatively more attractive than peers in the United States or Europe. It is true that some Asian countries suffer when oil and energy prices rise, notably South Korea and India. In many cases, however, Asian companies can still outperform.
ôWe continue to prefer Asian domestic-demand stories rather than exporters; the real economy to the financial economy, and companies with real assets rather than paper ones,ö Pidcock says.
One of his favourite stocks is AustraliaÆs BHP Billiton, which has benefited from rising energy prices, is well hedged against currency or commodity price movements, and has attractive assets in the ground, notably uranium.
He also likes China National Offshore Oil Corp (Cnooc), which Pidcock reckons is better placed than Western oil majors. It can buy assets in parts of the world that are politically difficult for US or European companies to penetrate, it has a low price-to-earnings ratio, it has good assets, and pays attractive dividend yields. Moreover, unlike other Chinese oil companies, it is a pure play, not an integrated company with refinery businesses.
Pidcock says ThailandÆs PTT is also attractive relative to most Western energy companies, again because it is cheap and has decent assets. ôBut Australia is our favourite place,ö he says, where M&A opportunities abound that will benefit investors.
Energy is not the only theme that drives security selection at NewtonÆs Asia funds range. Others include what the firm calls æearth mattersÆ (ie issues of environmental exploitation, which are raising government and consumer concerns); æpopulation dynamicsÆ and urbanisation. The firm also observes rising government interference in economic policy and a peaking of global trade liberalisation having an impact on stocks. Many of these factors are related to the central theme of energy supply.
In terms of geography, Pidcock has his biases. He avoids stocks in Indonesia, where he sees high levels of corruption and poor governance. He does not see many well-managed companies from Korea, where dividend yields are ôappallingö, and where manufacturers face an uphill battle against Chinese rivals while being hobbled by powerful labour unions.
On the positive side, he is keen to invest for the first time in Vietnam, although Pidcock says the market still needs time to mature, and for the legal framework to become more clear. He invests in many stocks listed in Singapore, which he feels attracts good regional stories. And he favours Taiwan, which boasts many well-managed companies that are rapidly integrating themselves into mainland China. For Pidcock, the Taipei market is a good way to actually buy the China story. Names such as TSMC offer high dividend yields, have strong balance sheets, and are on their way to becoming de-facto mainland companies.
The AU$85 billion ($61.6 billion) Australian super fund has some exposure to indebted property developer Evergrande. Meanwhile, China’s construction finance is part of its core strategy in real estate.
Investors are seeing the risks, but also the opportunities of the logistics sector. Warehousing their fears for the moment, they can see it's a good conduit to high-growth assets.
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SGX’s new framework for Spacs will likely provide investors with a much-needed channel for direct deals, but the verdict is still out on whether it will bring liquidity to the bourse.