This is the first part of a mid-year AsianInvestor series on the investment outlook of fund managers with Asian equity portfolios.
Paul Chan is the CIO for Asia ex-Japan at Invesco Hong Kong. He joined Invesco in November 2001 as an investment director and head of Hong Kong pensions and assumed his current role in July 2007. He has 19 years of experience covering the Hong Kong and China markets.
Chan oversees a Hong Kong-based investment team responsible for the Asia ex-Japan market, which manages around $7.6 billion in assets. Globally, Invesco manages around $348.2 billion.
Chan's responsibilities include Hong Kong and China institutional and pension mandates.
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?
How different or similar is your 12-month investment outlook now compared to the start of this year?
Our positive view on China has not changed over the past 12-months. We maintained our conviction that China will be first to recover due to its relatively sound fundamentals, compared to the developed markets.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
For Asia in general, we have reduced our exposure in defensive sectors such as telecom services and utilities and raised our exposure in domestic consumption stocks. We have also increased exposure in banks on better growth outlook and more upward earnings revisions. Meanwhile, we have also increased exposure selectively in industrials and materials sectors, due to our anticipation in demand pick-up as order books resulting from the various stimulus packages will start to filter through in the second half of 2009. Overall, we maintain a balanced portfolio and adhere to our investment discipline under this market environment.
What are the greatest lessons you have learned from the global financial crisis and how will this affect the way you manage your portfolios?
We witnessed the Asian financial crisis 10 years ago. While today's global financial crisis generally stems from the developed world, deleveraging will take time. We believe Asia, in particular China, will be among the first to recover in this crisis. In fact, we have already anticipated the magnitude of the current financial crisis and have taken this into account in our positioning by maintaining a balanced portfolio focusing on companies with high earnings visibility and solid balance sheet. Going forward, we will continue to use this approach and keep to our bottom-up stock selection process.
How has your view of Asian equities changed since the start of 2009 when investor sentiment was generally gloomier?
Asian equities rallied on expectations of tentative signs of improvement in some data point towards economic recovery later in the year. Global funds continue to flow into Asia, boosting liquidity as well as asset prices. Risk appetite has reached high levels. Our views on Asian equities remained the same, as we expect Asian markets to be the first to recover in this crisis.
How has the swine flu affected your investments?
It appears that swine flu does not have a significant impact on market sentiment of the Asian stock markets, as stock markets rallied sharply amid ample liquidity, doubled with investors renewed interest to resume risk-taking. As of late, swine flu has not affected us in our stock-picking.
What are your market weightings within an Asia ex-Japan equities portfolio?
Our geographic allocations as of March 31, 2009 were:
China - overweight
Hong Kong - overweight
India - overweight
Indonesia - overweight
Korea - underweight
Malaysia - underweight
Pakistan - N/A
Philippines - overweight
Singapore - underweight
Sri Lanka - N/A
Taiwan - underweight
Thailand - underweight
Vietnam - N/A
What are your favoured markets in Asia?
We favour China and India due to their long-term secular growth story, reasonable valuations and favourable government policies.
What are the markets you are going to steer clear of in the next 12 months?
We remain cautious on Taiwan amid its low earnings and order visibility beyond the second quarter as current demand from recent destocking diminishes. On a positive note, we feel that the well-progressed cross-strait relation will support local sentiment and become a potential catalyst for Taiwan stocks with China themes. In Thailand, we have concerns in the political situation. The recent riot has prompted us to re-evaluate the adverse impact the political instability has tolled on corporate profit and economic recovery.
Which sectors do you expect to outperform in the next 12 months?
With aggressive stimulus packages announced by various Asian governments, we expect these stimulus packages to translate into investment opportunities in infrastructure related sectors, especially in China where we expect order books to expand in the second half of 2009, following last November's large stimulus package. As such, we will look for investment opportunities within the infrastructure-related sectors. Also, we favour consumption-related sectors as Asian governments are dedicated to stimulate domestic consumption within their respective economies.
Which sectors do you expect to underperform?
In the long run, we expect the performance of companies to reflect fundamentals. As such, we expect sectors and companies without solid fundamentals -- those with highly leveraged balance sheets, negative cash flows, poor earnings, etcetera -- to underperform against the broader market in the longer term.
What are the main challenges that you expect to face in the coming 12 months?
The main challenge is to continue to adhere to our investment discipline at all times, in particularly at times when valuations may be stretched. As recent trends support the argument that investors are ignoring fundamentals and chasing beta indiscriminately, valuations for some sectors/ markets may no longer be cheap. We will continue to adhere to our investment discipline, by focusing on our investment style: GARP (growth at reasonable price) and value plus catalyst.
Whilst short-term Asian market performance will likely be driven by liquidity and fund flows, we have solid conviction that medium term investors will be rewarded as equity markets converge and return to focusing on fundamentals and corporate profitability. We believe that patience and adherence to discipline will be the key under this environment.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
In the midst of the global crisis, a key risk to investing in Asia is that Asian countries will inevitably suffer from weak exports due to the shrinking demand from the developed economies. As such, Asian governments are now focusing on stimulating investments and domestic consumption for their respective economies via stimulus packages and other fiscal measures, as these are areas that they can control. We will continue to keep to our bottom-up stock selection and avoid companies that will be severely affected by export weakness.