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What are the biggest opportunities that you see in the markets you are responsible for in the coming year? How are you preparing to take advantage of those opportunities?
Pai: Overall, we are still positive on the Asia ex-Japan region though corporate earnings growth in 2008 may not be as strong as they are in 2007. We expect growth in the region to outpace that of the developed economies. Countries in the region will benefit from the pro-growth government policies which help push for more infrastructure growth with the help of strong fiscal balance.
On the back of the strong economic growth, consumers in Asia are experiencing decent income growth and a change in lifestyle, which in turn drives domestic consumption. Generally, we anticipate robust domestic consumption to help to offset a slowdown in exports from the weaker US economy.
The Asia ex-Japan region is shifting from being export-oriented to more domestic-oriented economies. Also, some of the countries in Asia are still enjoying a relatively low interest rate environment, which is a positive catalyst for economic growth. On the corporate front, companies have become financially more prudent after the Asian crisis. A lot of them have better free cash flow and are able to pay out dividends.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the run-up to the coming year?
We have not changed our asset allocation drastically. We continue to like domestic-oriented themes and sectors.
What are your favoured markets in Asia?
We favour the Southeast Asian markets as they have been the laggards in 2007. As we continue to see economic growth in the Southeast Asian countries, we expect them to be able to catch up with their regional peers.
For example, even if we are cautious over potential interest rate and inflation pressures in Singapore in 2008, we continue to see value emerging from that market. We also like Korea because of its improved domestic demand environment and more favourable government policies after the presidential election in December.
What are the markets you are going to steer clear of in the coming year?
We think that each market will have its own opportunities. With the strong market run-up in 2007, we will be more selective in our sector picks rather than abide by a strict market approach.
What are your market weightings within an Asia ex-Japan equities portfolio?
China - Underweight
Hong Kong - Overweight
India - Underweight
Indonesia û Neutral, heading to Overweight
Malaysia - Neutral
Philippines - Neutral
Pakistan û N/A
Singapore û Neutral, heading to Overweight
Taiwan - Underweight
Thailand - Overweight
Vietnam û N/A
Which sectors do you expect to outperform in the coming year?
We continue to like the infrastructure sector. The robust economic growth in the region and the favourable government policies serve as positive catalysts. Also, the healthier fiscal condition of the different countries will help to fund infrastructure needs.
We also like sectors that will benefit from robust domestic consumption. Consumers in the region are enjoying improvements in their lifestyles on the back of income increases, lower tax rates and better job security, which will boost domestic consumption. As for the impact of the slowing US economy, we expect Asia to be quite resilient as the strong domestic consumption will help serve as a buffer on the downside.
Which sectors do you expect to underperform?
The utilities sector will face difficulties as companies might be restricted by regulations and fail to pass on the increase in costs resulting from the recent surge in energy prices.
What are the main challenges that you expect to face in the coming year?
Politically, there will be elections in a number of the Asian countries such as Korea, Malaysia, Taiwan and Thailand. We think the outcome of these elections may have impact on the market direction as the resulting change in government policies will affect the economic growth in these countries. On the monetary front, we expect China, Korea, Singapore and Taiwan to continue to face interest rate pressures in 2008. Inflation is also a concern for some of the countries.
Basically, we are not seeing a recession in the US but will watch out for the magnitude in the slow down of the economy.
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