Investor outlook: Parbrook cautious

As part of our fund manager series, Robin Parbrook of Schroders gives his views on Asia in 2004.

Robin Parbrook is the Hong Kong-based head of equities for Schroder Investment Management and gives his views here on what sort of year Asian equity markets are likely to have.

Are you optimistic about Asian markets in 2004?

Parbrook: We're cautiously optimistic about Asia, and cautious on the global markets, particularly the United States. The question is whether the growth from China and the United States is going to have enough momentum to support Asia at its current valuations, which are not particularly cheap.

Certainly, the easy liquidity-driven stage of the Asian markets is over. Now it is much more about which companies are going to deliver on earnings.

Although it is tougher going from here, I do think that Asian markets will do well relative to global markets. Investors can make money in absolute terms, but it won't be anything spectacular.

Using your bottom-up approach, are you finding any particular Asian country is going to be promising?

We are finding opportunities in Korea, where the market has been out of favour recently. We are picking up some of the consumer stocks there. Everyone seems to be focusing on the credit card bad debt problem, but we think this has already reached its peak.

I feel happy with some of the good Singapore names, as this market has corrected a little bit. They pay out good dividend yields, which for some stocks is way over long term bond yields. This gives us a sense of protection on the downside. But there is still some potential upside if the economy continues to tick along okay. It may not be a racy story, but with the markets already up 60% we don't necessarily think it is going to be a racy market environment next year.

We are also happy with some of the Hong Kong domestics, but it is very selective in Hong Kong.

What do you think of the Hong Kong property sector?

We don't like it at all. Effectively, we are almost zero weight in the sector.

While I am optimistic for the luxury sector, most property developers have largely mass residential property and this sector remains extremely difficult. There is a massive oversupply, and unemployment rates in Hong Kong continue to be high. Although we're expecting property prices to rise in 2004, this will not be enough to justify current share prices.

I think the market forgets that most property companies only develop property as part of their business. About 60% is actually investment properties or investment assets, which aren't very exciting.

What are your favourite sectors in China?

We are happier having some of the infrastructure plays, as well as some of the toll road companies and port operators. They are not at a compelling value, but we're still reasonably comfortable with them.

In general, there is not much we like in China. We are being very selective. The fact that it's so much in vogue leaves me increasingly cautious.

Plus, there are plenty of IPOs still to come.

Thailand was an outstanding performer last year. What do you think of its prospects this year?

I think everything is already reflected in the price. It's had a fantastic run, but we do not find much from a bottom-up perspective and do not want to buy at these levels.

What competitive advantage does Thailand really have? It doesn't have a good education system or infrastructure. It is a nice place to go on holiday and it has a comparative advantage in agriculture. Outside that, I think for the manufacturing sector in Thailand its going to remain hard going. China definitely has better ingredients, which is why the FDI is going there and not to Thailand.

What do you think of the tech sector in Taiwan?

At the moment, we have a small overweight in this sector. Although the sector has had a reasonably good run, our bottom-up analysts are still quite comfortable with stocks at these levels.

Asian companies are still winning market share from Japanese competitors and elsewhere. But we're being quite selective. We are happier with the upstream rather than the downstream and are not keen on contract manufacturers.

Any comments on Japan?

I don't cover Japan, but I don't think there is going to be a rapid Japanese turnaround that is suddenly going to boost demand for Asian exports. The Japanese recovery will be on the margin. It will be positive because it is not causing a drag on the region, but it is certainly not going to be a driver.

From your analysis, is any favourable trend emerging for investment opportunities in 2004?

It's easier to find things we are negative on rather than positive on.

In terms of trends, clearly there is going to be a pick-up in domestic Asian demand. But we think most of this is already in the price. If you look at Hong Kong banks, the mid-cap banks have doubled. Are they really going to see a turnaround that is enough to justify doubling their share prices?

The theme is going to be avoiding the pitfalls and watching out for where the disappointments are going to come from.

FinanceAsia is running a competition to predict the level of our Asian blue chip index The FinanceAsia 100 and a case of champagne will be awarded to the entrant that comes closest to predicting the level on December 17. If anyone predicts the number exactly, they will win an iPod music player. The current level of the index is 1220 and entries should be made as round numbers to [email protected]