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QDII managers are warming up to other Asian countries, and South Korea looks poised to become the next favorite arena. Given its geographical and cultural proximity, SunÆs team says it will become a strategic market for China in North Asia, while Japan is still too politically sensitive for most fund managers. A bull run for Korea might be in order as the æwall of moneyÆ from QDII reach Korean shores.
The Kospi is trading at a price-earning ratio of 13x, while overall GDP growth hovers at 5%. This looks like a bargain for QDII managers who are used to seeing 60x levels traded on the bourses of Shanghai and Shenzhen. HSBC speculates that in a worst-case scenario, assuming only 10% of QDII monies are allocated to the Kospi, that market will receive $15 billion. The upside potential is massive, suggesting Korea will experience a Hong Kong-style bull run in the coming months.
Overall, the Kospi has climbed over 600 points since November 2006 to its latest high at 2064.85 on October 31. Recent volatility in AsiaÆs stock markets has set the Kospi back to 1,900 points. Compared to the latest trough at 1,638.07 on August 17, when the first wave of the US subprime crisis hit Asia, it still has posted a 300-point gain.
Overseas-listed Chinese stocks will be another strong theme that QDII managers plan to include in coming fund portfolios. As the A/H share valuation differential narrows, fund managers are increasingly vocal about China plays in Singapore, on Nasdaq and on JapanÆs bourses. Managers in China believe these stocks promise under-researched opportunities, as some are not covered by international managers.
Currently, a total of 111 S-shares and another 44 of such obscure names exist on the SGX and Nasdaq respectively. Some like China Aviation Oil, a Singapore-listed company with market capitalization of $1.3 billion, strangely have no analyst coverage outside of China.
Taiwan is another area of interest that managers say they want to be in. Its market average p/e level of 13x is similar to KoreaÆs, and 70% of its market cap is dominated by technology sector. HSBC says mainland investors expect improvements to political ties and investment links following TaiwanÆs presidential elections in March 2008. However, as current regulations on both the mainland and Taiwan bar cross-strait investments, Hong Kong-listed Taiwan names are also looking to be on QDII fundsÆ shopping list for the coming year.
Elsewhere in the region, HSBC believes markets in Australia and Singapore will attract mainlandersÆ interest for their low volatility and high growth, while India will attract little attention because of cultural differences and a high barrier to entry. US and European equities will see little interest in 2008 as Chinese investors wait to sit out the subprime gloom.
SunÆs team also predicts the China Investment Corporation will invest up to $67 billion next year, while the long-expected personal investment scheme for mainland nationals (the ballyhooed æthrough trainÆ) will launch by the second quarter next year, adding another $27 billion of outflows by the end of 2008.
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