F&C Investments bullish on healthcare
Investment Outlook Series: Mike Hanbury-Williams, Asia-Pacific equities head at F&C, says the aging population and rising personal wealth in China are among the reasons for betting on the healthcare sector.
This is part of an AsianInvestor series on the investment outlook of fund managers with Asian portfolios.
Mike Hanbury-Williams is the London-based head of Asia-Pacific equities at F&C Investments. He has over 20 years of experience in the Pacific basin. Prior to joining F&C in 1990, he worked at Citicorp from 1989, where he helped set up the company's equity sales desk in London. He began his career at Aetna Life in 1984, managing Far East equity funds, and where he was based in Hong Kong from 1987.
F&C Investments is part of London-listed F&C Asset Management, which traces its origins back to 1868 with the launch of the Foreign & Colonial Investment Trust, the first ever publicly listed investment fund. F&C Investments recently opened its first Asian office in Hong Kong. It manages $202 billion worldwide, including around $5 billion in Asia-Pacific ex-Japan equities.
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?
Hanbury-Williams: We think that emerging markets in general and Asia-Pacific ex-Japan in particular still represent the current engines of global growth. Growth in the region is driven by two main factors: domestic demand and increasing infrastructure spending.
We are observing a rising share of consumption for key products. In PC shipments, Asia- Pacific ex-Japan now represents a market of approximately the same size as the US. Telecommunications also represent a big opportunity in the coming 12 months. In India alone, the mobile penetration is growing at a pace of 25%-30% a year in the face of increasing levels of disposable income.
Our three favourite companies are Rio Tinto, Golden Agri Resources and Cnooc.
Australia-based Rio Tinto owns and operates world class, long life bulk and base metal assets. The valuation of these assets continues to rise owing to robust commodity demand from the emerging economies of the world, and the rapid escalation of capital costs related to the expansion of existing mines and the discovery of new prospects.
Golden Agri Resources, a Singaporean-listed company, is one of the largest palm oil producing groups in Asia. ItÆs fully integrated (plantation, milling and refining) operating assets are based in Indonesia and produced 1.6m tonnes of crude palm oil (CPO) in 2006. We expect CPO end-demand to increase largely and interest for cooking oil to rise from the rapidly growing emerging economies, supported by the larger use of CPO as feedstock for biodiesel.
Cnooc is the Chinese offshore oil and gas, exploration and production major with exclusive rights pertaining to the discovery of potential finds by international operators in offshore China (particularly the South China Sea). It is set to deliver oil and gas production growth in excess of its Chinese peers and is not exposed to punitive losses on refining operations caused by price controls set by the central government.
How different or similar is your 12-month investment outlook now compared to the start of this year?
Overall our outlook has remained the same. We remain more positive on the domestic part of the economy than on exports which have been negatively impacted by the global economic downturn. Within the domestic environment, we have shifted our focus slightly because of the higher than expected inflation rate and, consequently, the continued potential for monetary tightening. Within that, we have started to take positions in companies that are slightly more inflation resilient. Particular areas for that will be education and healthcare.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
Recently we have been investing in the healthcare sector which we think represents a promising theme in the longer term. Three drivers underpin this view: the Chinese population is getting older, wealthier and the government still insists on a one child policy. All of those would mean there is potential for growth in healthcare expenditure.
What we have also seen more recently relates to the governmentÆs concern over pollution in China and its subsequent decision to increase its expenditure on healthcare. Because of the growing wealth effect and the movement from state-owned enterprise employment to private company employment, individuals and corporates are taking out more health insurance.
Finally, medical companies are also offering their own form of health insurance. We believe that in addition to the ongoing drivers and expenditure on healthcare there are current triggers to accelerate that growth. We have chosen to play it through the medical device companies such as China Medical Technologies.
What are your favoured markets in Asia?
We are thematic investors and therefore we donÆt invest on a country basis as we feel there are opportunities within all countries.
What are the markets you are going to steer clear of in the coming year?
There are local factors such as political situations that one needs to pay attention to. In particular, we are concerned about the political environment in Thailand, the potential uncertainties in Malaysia, and the potential leadership challenge in Indonesia.
What are your market weightings within an Asia-Pacific ex-Japan equities portfolio?
We had the following portfolio holdings as of June 30, 2008:
China: 22.32%
Australia: 16.73%
Hong Kong: 12.38%
Korea: 11.92%
Singapore: 9.91%
Taiwan: 9.01%
India: 6.02%
Malaysia: 3.65%
Indonesia: 2.57%
Cash: 2.19%
Thailand: 2.14%
Philippines: 1.16%
New Zealand:
Pakistan: 0
Sri Lanka: 0
Which sectors do you expect to outperform in the coming year?
From a sector point of view, we are still positive on the outlook for growth in the Asian economies and therefore for the demand for both hard and soft commodities.
Which sectors do you expect to underperform?
We have started to reduce our exposure to physical commodities while maintaining our exposure to the service sector on the commodity side. We have remained concerned on the financial sector because of the question marks over loan growth and credit risk going forward.
What are the main challenges that you expect to face in the coming 12 months?
Inflation has run ahead of targets and will continue to do so. Consequently, there is growing pressure to tighten monetary policy in the region as a whole, in particular as countries in Asia run negative real interest rates.
The key to the markets going forward will be how the inflation scenario develops. For this there are three main ingredients.
The first one is that food prices have been rising very rapidly for over a year. However, in the last few weeks there have been signs that food prices have peaked and start to come down. A second aspect is that we will probably not see the sharp acceleration in the food prices that we have seen previously. So the year-on-year comparison will look more favourable.
The second inflation ingredient concerns rising energy prices. Given the significant rise in fuel prices over the past year it is unlikely that you will see a similar rate of growth over the next year which will relieve inflationary pressure going forward. The counter argument is that some Asian countries have been subsidising fuel prices and have only recently started to remove those subsidies, something that could cause a rise in the cost of energy. This means it could take same time before we see inflation coming down.
The third ingredient of inflation relates to core inflation which we believe is rising but at relatively steady and sensible pace. Core inflation has more to do with the transfer of wealth from West to East and, structurally, it will continue. However itÆs not as volatile as food or energy prices. So to sum it up, headline inflation should start to fall over coming months, easing some of the concerns over monetary policy.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
Current high market volatility, short term movements and swings in economic data as well as commodity prices. Despite the current higher volatility, our risk profile has remained pretty much the same. We still see value in a number of opportunities within the portfolio.
Mike Hanbury-Williams is the London-based head of Asia-Pacific equities at F&C Investments. He has over 20 years of experience in the Pacific basin. Prior to joining F&C in 1990, he worked at Citicorp from 1989, where he helped set up the company's equity sales desk in London. He began his career at Aetna Life in 1984, managing Far East equity funds, and where he was based in Hong Kong from 1987.
F&C Investments is part of London-listed F&C Asset Management, which traces its origins back to 1868 with the launch of the Foreign & Colonial Investment Trust, the first ever publicly listed investment fund. F&C Investments recently opened its first Asian office in Hong Kong. It manages $202 billion worldwide, including around $5 billion in Asia-Pacific ex-Japan equities.
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?
Hanbury-Williams: We think that emerging markets in general and Asia-Pacific ex-Japan in particular still represent the current engines of global growth. Growth in the region is driven by two main factors: domestic demand and increasing infrastructure spending.
We are observing a rising share of consumption for key products. In PC shipments, Asia- Pacific ex-Japan now represents a market of approximately the same size as the US. Telecommunications also represent a big opportunity in the coming 12 months. In India alone, the mobile penetration is growing at a pace of 25%-30% a year in the face of increasing levels of disposable income.
Our three favourite companies are Rio Tinto, Golden Agri Resources and Cnooc.
Australia-based Rio Tinto owns and operates world class, long life bulk and base metal assets. The valuation of these assets continues to rise owing to robust commodity demand from the emerging economies of the world, and the rapid escalation of capital costs related to the expansion of existing mines and the discovery of new prospects.
Golden Agri Resources, a Singaporean-listed company, is one of the largest palm oil producing groups in Asia. ItÆs fully integrated (plantation, milling and refining) operating assets are based in Indonesia and produced 1.6m tonnes of crude palm oil (CPO) in 2006. We expect CPO end-demand to increase largely and interest for cooking oil to rise from the rapidly growing emerging economies, supported by the larger use of CPO as feedstock for biodiesel.
Cnooc is the Chinese offshore oil and gas, exploration and production major with exclusive rights pertaining to the discovery of potential finds by international operators in offshore China (particularly the South China Sea). It is set to deliver oil and gas production growth in excess of its Chinese peers and is not exposed to punitive losses on refining operations caused by price controls set by the central government.
How different or similar is your 12-month investment outlook now compared to the start of this year?
Overall our outlook has remained the same. We remain more positive on the domestic part of the economy than on exports which have been negatively impacted by the global economic downturn. Within the domestic environment, we have shifted our focus slightly because of the higher than expected inflation rate and, consequently, the continued potential for monetary tightening. Within that, we have started to take positions in companies that are slightly more inflation resilient. Particular areas for that will be education and healthcare.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
Recently we have been investing in the healthcare sector which we think represents a promising theme in the longer term. Three drivers underpin this view: the Chinese population is getting older, wealthier and the government still insists on a one child policy. All of those would mean there is potential for growth in healthcare expenditure.
What we have also seen more recently relates to the governmentÆs concern over pollution in China and its subsequent decision to increase its expenditure on healthcare. Because of the growing wealth effect and the movement from state-owned enterprise employment to private company employment, individuals and corporates are taking out more health insurance.
Finally, medical companies are also offering their own form of health insurance. We believe that in addition to the ongoing drivers and expenditure on healthcare there are current triggers to accelerate that growth. We have chosen to play it through the medical device companies such as China Medical Technologies.
What are your favoured markets in Asia?
We are thematic investors and therefore we donÆt invest on a country basis as we feel there are opportunities within all countries.
What are the markets you are going to steer clear of in the coming year?
There are local factors such as political situations that one needs to pay attention to. In particular, we are concerned about the political environment in Thailand, the potential uncertainties in Malaysia, and the potential leadership challenge in Indonesia.
What are your market weightings within an Asia-Pacific ex-Japan equities portfolio?
We had the following portfolio holdings as of June 30, 2008:
China: 22.32%
Australia: 16.73%
Hong Kong: 12.38%
Korea: 11.92%
Singapore: 9.91%
Taiwan: 9.01%
India: 6.02%
Malaysia: 3.65%
Indonesia: 2.57%
Cash: 2.19%
Thailand: 2.14%
Philippines: 1.16%
New Zealand:
Pakistan: 0
Sri Lanka: 0
Which sectors do you expect to outperform in the coming year?
From a sector point of view, we are still positive on the outlook for growth in the Asian economies and therefore for the demand for both hard and soft commodities.
Which sectors do you expect to underperform?
We have started to reduce our exposure to physical commodities while maintaining our exposure to the service sector on the commodity side. We have remained concerned on the financial sector because of the question marks over loan growth and credit risk going forward.
What are the main challenges that you expect to face in the coming 12 months?
Inflation has run ahead of targets and will continue to do so. Consequently, there is growing pressure to tighten monetary policy in the region as a whole, in particular as countries in Asia run negative real interest rates.
The key to the markets going forward will be how the inflation scenario develops. For this there are three main ingredients.
The first one is that food prices have been rising very rapidly for over a year. However, in the last few weeks there have been signs that food prices have peaked and start to come down. A second aspect is that we will probably not see the sharp acceleration in the food prices that we have seen previously. So the year-on-year comparison will look more favourable.
The second inflation ingredient concerns rising energy prices. Given the significant rise in fuel prices over the past year it is unlikely that you will see a similar rate of growth over the next year which will relieve inflationary pressure going forward. The counter argument is that some Asian countries have been subsidising fuel prices and have only recently started to remove those subsidies, something that could cause a rise in the cost of energy. This means it could take same time before we see inflation coming down.
The third ingredient of inflation relates to core inflation which we believe is rising but at relatively steady and sensible pace. Core inflation has more to do with the transfer of wealth from West to East and, structurally, it will continue. However itÆs not as volatile as food or energy prices. So to sum it up, headline inflation should start to fall over coming months, easing some of the concerns over monetary policy.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
Current high market volatility, short term movements and swings in economic data as well as commodity prices. Despite the current higher volatility, our risk profile has remained pretty much the same. We still see value in a number of opportunities within the portfolio.
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