JFÆs Victor Lee says China remains the focal point

Lee says the deleveraging of US credit remains the biggest challenge for all investors.

Victor Lee is a regional investment manager and technology specialist with JF Asset Management's Pacific Regional Group in Hong Kong.  He joined the firm as a research analyst in the Global Portfolios Group in 1997 and was responsible for North America research. He was then transferred to the Pacific Regional Group as a regional investment manager in 1999 and since then has specialised in Asia-Pacific equities, including Japan. He also manages absolute return and technology funds. JF Asset Management has changed its company name to JP Morgan Asset Management, but it has kept its previous brand name in Asia. He shares with AsianInvestor his views about Asian equities.

Looking at a one-year period or beyond, what is your outlook for Asian equities?

Victor Lee
Victor Lee
Lee: Global markets including Asia have rallied strongly over the past weeks and we are seeing signs that markets have risen too much too fast. It should not be a surprise to anyone if we see a short-term correction. However, the fundamentals in Asia have improved in recent months, thanks to the strong loan growth in China during the first quarter. Better liquidity environment allows Asian companies to get credit from banks and new bond issuance. While export weakness remains the weakness link for Asian growth, domestic consumption should be able to pick up the slack.

What are the biggest opportunities that you see in the coming 12 months? 

China of course is the focal point. We may indeed see China outperforming global markets as the fiscal packages continue to gain traction. It has strong deposit base and fiscal power to keep its economy on track. I am also warming slightly to Japan over the short-term. Japan was massively underweight in many global funds and equity market has lagged behind this rally. The coming election could well be a catalyst for its stock market. In general, I prefer to look at market that most people ignore, that is how you can find opportunity. 

What are the biggest challenges that you expect to face?

The deleveraging of the US debt bubble is still the biggest challenge of all. Initially, Asian market was sold off massively alongside with global market. However, we have seen some signs that Asian market starts to behave slightly differently, as demonstrated by the strong gain of China's A-share market and strong demand of Asian credit in the recent new offerings.

Has the global financial crisis and its impact played out the way you thought it would?

It is every fund manager's dream to have a crystal ball which tells him how global market would unfold from time to time. Unfortunately, I do not have one. My job is to deliver consistent performance for my clients in funds that I manage versus the benchmarks given. I think we have demonstrated that by two funds that I manage -- JF Pacific Securities and JF Asia Absolute.

How has your view of Asian equities changed, if at all, since the end of 2008 when investor sentiment was generally gloomier?

The strong loan growth in China during the first quarter was a key event for Asia. Liquidity is like the blood circulation, which provides oxygen to each part of the body. There was no country in the world which could growth its loan book by 20% of its GDP in just one quarter. We should expect economic activity and domestic consumption to recover on the back this accommodative liquidity situation.

How has the swine flu affected your investments, if at all?

The fatality rate of swine flu is not very high and most patients could recover after the medication. Asia has learned its experience in how to contain the disease during the Sars outbreak in 2003. I think such an experience would be useful to prevent a similar outbreak of swine flu in Asia.

Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months, whether because of the crisis, the swine flu, or other reasons?

Our country asset allocations haven't changed significantly over the last few months. We are currently mainly overweight China. As a measure of stability has returned so risk appetite has edged up bringing Asia back onto global investors' radar. China's success in keeping its domestic economy rolling has caught the world's eye and Asia's better positioning in this crisis has led to prices being marked up sharply. We still remain in trading markets however.

What are your favoured markets in Asia?

As discussed, we currently favour China. The macro data points have all picked up and the world is indeed searching for hope amidst these uncertain times. Fixed asset investments and loan growth are all moving in a positive direction. Recent retail sales continued to hold up well, consistent with improving macro conditions and strong sales of homes and autos. Our China country specialists believe the first quarter GDP for China was the nadir. However, given the liquidity improvements in the economy which has largely been the driver of the recent stock market rally, earnings still need to show year-on-year improvement in order that this rally is sustained. Overall we remain optimistic over the longer-term but recognise that we are in a period of adjustment

What markets are you bearish over?

We are underweight the more globally leveraged Asian economies like Singapore, Taiwan and Korea.

What are your market weightings within an Asian equities portfolio?

Our weightings within JF Pacific Securities are:

  • China - overweight
  • Hong Kong - overweight
  • India - overweight
  • Indonesia - underweight
  • Korea - underweight
  • Malaysia - neutral
  • Philippines - underweight
  • Singapore - underweight
  • Taiwan - underweight
  • Thailand - overweight
  • Japan - overweight

Which sectors do you expect to outperform in the next 12 months?

China would be the key contributor of growth to the region in the near future. In this environment, I think commodities can perform well as infrastructure spending would remain strong.

What are the main risks of investing in Asia at the moment? How are you managing those risks? 

Asia has strong deposit base and Asian governments have responded to the global crisis by lowering interest rates and massive fiscal spending. Such a loose monetary and fiscal position would provide a short term stimulus to the economy, however, strong economic growth coupled with loose monetary policy could result in asset inflation for the long term, as we saw in Japan during the 1980s. It is a very important task for banks and governments in Asia to avoid marginal lending to flow into unproductive asset class.

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