The Dutch pension asset manager's Asia Pacific head of real estate says his team has just had one of its busiest years ever and that 2021 is looking similarly promising.
The first to share his views in this 2008 investment outlook series is Victor Lee, a Hong Kong-based regional investment manager and technology specialist at JF Asset ManagementÆs Pacific regional group.
Lee joined the company as a research analyst within JF Asset ManagementÆs global portfolios group in 1997 and was then responsible for North America research. He moved to the Pacific regional group in 1999 and has since then specialised in Asia-Pacific equities, including Japan.
JF Asset ManagementÆs Pacific regional group manages around $72 billion in Asia-ex Japan equities. The companyÆs overall assets under management in Asia, including Japan, total around $120 billion.
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?
Lee: We are staying positive on Asia as currencies are strong, growth is evident and valuations û though no longer cheap û are not unreasonable. New QDII approvals by China and continuing mergers and acquisitions across the region, especially in the mining sector, are reminders that liquidity is still abundant here in Asia. Also, as long as the US is not going into full recession, which remains our central view, any renewed growth scare and subsequent accelerated US Federal Reserve monetary easing will only create another reason to invest in Asia, as it helps the regional asset reflation story.
The drivers of regional growth are increasingly domestic in nature (consumption, private and public investment) instead of external (exports). Therefore, our focus is on stocks benefiting from AsiaÆs vibrant domestic growth in the property, financial, infrastructure, retail and food and beverages sectors. Not regional exporters who are more exposed should subprime problems further negatively impact the US economy.
Specifically, Chinese banks and property stocks are by far the biggest active bets in our Asian regional portfolios. We expect continued strong growth in consumer loans, such as credit cards, where the number of card holders is growing at a very rapid rate, and in residential mortgages. We believe the secular urbanisation trend in China is a boon for the property sector, especially residential and retail developers.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the run-up to the coming year?
The outlook for 2008 remains solid for Asia, with domestic consumption remaining a strong secular growth story. Hence, we believe any major price weakness will present a good long-term buying opportunity. Our portfolio strategy remains essentially unchanged, as we continue to be oriented more towards domestic consumption plays, properties and regional infrastructure stocks.
What are your favoured markets in Asia?
Our asset allocation in 2008 will continue to favour æChindiaÆ. We still like the domestic consumption and infrastructure investment themes, particularly the beneficiaries in China and India.
What are the markets you are going to steer clear of in the coming year?
The major concern for international equity investors today is how deep the US subprime shakeout will turn out to be, and what it will take to end the turmoil. Equity investors are still feeling a fair amount of nervousness given that tensions are again rising in the credit markets, despite two Fed rate cuts. Hence, the priority for strategy at the moment is to shun markets and companies that would be most negatively affected by the fallout.
Having said that, so far we have seen no immediate impact of the US subprime crisis on Asian earnings. In fact, earnings estimates for Asian companies continue to be revised upwards, led by the two big domestic-oriented markets of China and of India, where analysts forecast profits growth close to 20% for 2008. We continue to believe that Asia should weather the US slowdown better than it has in the past, thanks to the emergence of domestic growth drivers in an increasingly multi-polar world.
What are your market weightings within an Asia ex-Japan equities portfolio?
China - Overweight
Hong Kong - Overweight
India - Overweight
Indonesia - Overweight
Korea - Underweight
Malaysia - Underweight
Pakistan - N/A
Philippines - Neutral
Singapore - Neutral
Taiwan - Underweight
Thailand - Neutral
Vietnam - N/A
Which sectors do you expect to outperform in the coming year?
We maintain a bullish view on engineering services companies in the Middle East, as they are targeting the surplus wealth generated by rising petrodollar revenues. Implicit in our preference towards the sector is the increasing financial might of oil-producing countries that have benefited from a five-fold jump in the price of crude oil during the past six years. We expect construction and infrastructure companies with a strong presence in the Middle East to benefit from the regionÆs looming infrastructure boom.
Secondly, the rising portfolio outflow from China is a new key factor that will support Chinese H shares, Hong Kong stocks, and Asian equities in general. As a reminder, over $16 billion of QDII funds have been raised in China to invest overseas since August, with a disproportionate amount going to Hong Kong's H-shares and Red-chips. It is thought that another $20 billion of quota will be awarded to Chinese asset managers by year-end. Given that the free-float market cap of Chinese shares listed in Hong Kong is around $350 billion, the volume of QDII funds hitting Hong Kong is not insignificant. The through-train, when implemented at some point next year, will release even more liquidity into Hong Kong equities.
Which sectors do you expect to underperform?
Many exporters, especially IT manufacturers in Taiwan, are still relatively highly geared to the US economy, which reinforces our underweight stance there. A sharper US slowdown would hurt the whole world, and Asia would not be totally spared whatever one's views on decoupling.
Having said that, Asia in my view is less linked to the US than in the past. Intra-regional trade continues to increase and is gradually replacing the US consumer as the most important single driver. As an example, the size of the Chinese economy today is over $3 trillion. Exports are around $1.3 trillion, 20% of which goes to the US. A sharp US slowdown would still hurt China, but not as much as in the past when exports to the US were a higher share of the total. India is an even more closed economy, with exports only 15% of nominal GDP.
These are two large domestic-oriented economies with multiple growth drivers. And in ChinaÆs case, the government's fiscal position is so strong, with only a 1% fiscal deficit, that it can easily put into place fiscal spending measures to support the economy should that become necessary.
What are the main challenges that you expect to face in the coming year?
Some interpret the recent Fed interest rate cuts as signaling a much weaker-than-expected US economy in 2008 that will derail growth prospects for the traditionally US export-geared economies. That is still the biggest single worry, even if there are more grounds for expecting Asian economies and markets to prove more robust than in the past.
In the short term Asian equities could remain quite volatile, even with such a positive medium- to long-term outlook. Valuations in Asia are no longer as cheap as in 2005 or 2006, at around 16 times forward price/earnings ratio, though they are supported by strong earnings growth. There is therefore more temptation to take profits on valuation grounds.
Increased global risk aversion and volatility may lead to more unwinding of the Japanese yen carry trade, some of which has been used to fund investments in Asia. We saw this in the corrections of May 2006, February 2007 and August 2007, though in each case markets rebounded strongly afterwards as earnings across the region continued to be revised up.
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