Geoff Lewis is the Hong Kong-based head of investment services at JF Asset Management. He joined the firm in 1999. JF Asset Management has changed its name to JP Morgan Asset Management, but has retained its previous brand name in Asia.
JF Asset Management in Hong Kong manages around $85 billion. Of that total, around $47 billion is managed by the Pacific Regional Group, which is responsible for the management of all Asia ex-Japan and single country Asia mandates as well as Asian fixed income and balanced portfolios.
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?
We entered 2009 surrounded by negative sentiment. Earlier in the year global investors were waiting to see whether the bail out packages by governments and central banks would alleviate the stresses in the financial system. We were cautious then and still are, but participated in the recent rally. We told our clients that we think this rally is driven more by hope than by improving fundamentals. Simply because financial markets have stabilised does not imply that economies are now a lot healthier. There remain serious concerns with regard to the strength of the recoveries in activity and earnings and this will be reflected in market volatility.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
Our country asset allocations haven't changed significantly over the past few months. We are currently overweight China, India and Singapore. As a measure of stability has returned risk appetite has edged up, bringing Asia back onto global investors' radar screens. China's success in keeping its domestic economy rolling has caught the world's eye, and Asia's better relative positioning in this crisis has led to a sharp mark up in regional share prices. We still believe that we remain in a broad trading market, however.
More specifically, we recently trimmed India -- but remain overweight -- and added to Taiwan, given India's recent outperformance versus the regional Asia benchmark and Taiwan's corresponding underperformance.
What are the greatest lessons you have learned from the global financial crisis and how will this affect the way you manage your portfolios?
One important lesson is how quickly problems in one part of the US financial sector can spread to other regions and markets. Another lesson is how much damage can be inflicted on the real economy in a short space of time when financial markets seize up. Ideally, we would like to be more aware of the potential spill over risks to Asian equities before they occur, though this will be difficult to achieve. While the current crisis had its origins in the US housing bubble and subprime mortgage debacle, the next one will likely be very different in nature. One can draw some comfort from the relative outperformance of Asian and emerging market equities -- a partial decoupling that reflects their superior fundamentals.
How has your view of Asian equities changed, if at all, since the start of 2009 when investor sentiment was generally gloomier?
We have certainly seen marked improvements in China's macro data, though corporate earnings are still falling year-on-year. The macro improvements in China year-to-date have surprised many investors and offer some comfort in the fact that there still is growth in the world.
Regarding specifics, at the start of 2009 we were less aggressively positioned. However, as the market rallied we added more beta to our portfolios, though we viewed the rally as the first of many in this cycle. Lately, investors seemed to be anticipating a pull back in Asian markets, which indeed now looks to have begun.
Signs of regional economic recovery are starting to appear, though China apart, their foundations are not yet solid enough for us to declare victory.
How has the swine flu affected your investments?
At this moment, the fatality rate for swine flu is not high and the great majority of patients recover after taking medication. Asia learnt from its experience with Sars in 2003 how to contain that far more serious disease. We believe the lessons learnt then will help to prevent the spread of the disease should an outbreak re-occur.
What are your market weightings within an Asia ex-Japan equities portfolio?
China - overweight
Hong Kong - neutral
India - overweight
Indonesia - neutral
Korea - underweight
Malaysia - underweight
Philippines - underweight
Singapore - overweight
Taiwan - neutral
Thailand - neutral
What are your favoured markets in Asia?
As discussed, we currently favour China. The macro data points have nearly all picked up and the world is indeed searching for hope amidst these uncertain times. FAI (fixed-asset investment), IP (intellectual property) and loan growth are all moving in a positive direction. Retail sales continue 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 was the nadir for China. However, since liquidity and improvements in the economy have been the main drivers in the rally, earnings will soon need to show improvement if the rally is to be sustained. Overall we remain optimistic over the longer-term, but recognise that we are currently in a more difficult period of adjustment.
In general, we favour those markets that are less reliant on OECD (Organization for Economic Cooperation and Development) demand such as China, India and Indonesia rather than Korea or Taiwan. As discussed, the macroeconomic indicators for China have turned positive. Indeed, we may see some upward GDP revisions for both India and China. India post the election looks more attractive now the government has more control over implementing infrastructure projects that had previously been shelved or held back due to disagreements in parliament, mainly by the communists.
What are the markets you are going to steer clear of in the next 12 months?
Steer clear of would suggest a zero weighting. However, although we are less heavily weighted towards the more globally leveraged economies, we cannot afford to be fully out of markets which could well turn on signs of global recovery or better trade figures. We recently upgraded Taiwan, though this was mainly a tactical call given the recent underperformance. We regard Taiwan's growth as still being mainly driven by exports. Likewise, Korea is an underweight. Although it too has recently underperformed the region, we feel it is too early to warm towards Korea, which lacks a sufficiently strong domestic demand story.
Which sectors do you expect to outperform in the next 12 months?
China will be the key contributor to regional growth for the near future. In this environment, we believe that some commodities and basic materials can perform well as infrastructure spending will remain strong. As property transaction volumes have improved, we have also seen a rally in the property sector. We feel the rally in Asian property can extend further.
Which sectors do you expect to underperform?
Cyclical stocks may stay volatile for longer. Oil, metal and shipping are being driven by shifting views on global liquidity, the US dollar and global growth. We prefer sectors that lean more towards Asian beta than global beta.
What are the main challenges that you expect to face in the coming 12 months?
Following the sharp recovery in equity markets since early March, it is notable that the overall investor mindset has suddenly become very upbeat. According to the latest Merrill Lynch Global Fund Manager survey, growth expectations have increased, with just 7% of respondents now looking for recession to continue in the next 12 months, compared with 70% just two months ago. A majority of fund managers are now overweight equities and underweight bonds.
We sense that for now there is still time to take on risk. However, there seems to be a widespread recognition that a prolonged and difficult economic adjustment lies ahead, spanning years not months. We subscribe to this view. Commercial real estate and credit cards will deliver further shocks. Housing has yet to bottom. Unemployment will remain weak. The recovery will likely be slow and dogged by increased regulation. OECD demand for Asian manufactured goods will remain weak as a result.
Investment strategy thus critically depends on investors' risk appetite and investment horizon. The investment call rests on the expected time frame before the medium-term challenges catch up with the world economy and the investment community.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
The primary risk for China from here is how sustainable official policy measures prove to be, particularly if developed country growth rates remain below trend for an extended period while consumer demand fails to pick up the slack. For now, however, this seems a distant threat. The ability to rely upon its banking sector to kick-start economic recovery serves to illustrate one of the major differences between China and its Western counterparts -- its low domestic leverage. The banking sector's loan-to-deposit ratio and the federal government's debt-to-GDP ratio are both far lower than in any of the G7 countries.
There are also some concerns over the PBOC (People's Bank of China) raising interest rates too soon, though to us this does not warrant a high probability. China's central bank could, however, follow the Fed if the economy stays robust. But we doubt they will be first mover in the next global interest rate upcycle -- more likely, loan growth will be curtailed first.