ManulifeÆs Tahnoon Pasha says value to outperform growth

This is the fourth in a series of Q&As on Asian fund managersÆ investment outlook for 2008.
AsianInvestor has sought out Asian fund managers and asked them about their investment outlook for the coming year.

Tahnoon Pasha is vice-president and head of equity investments for Asia at Manulife Financial in Hong Kong, where he has been for the past 10 months. Prior to that, he was with the Abu Dhabi Investment Authority in the United Arab Emirates. He has managed equity investments for more than 17 years in total.

PashaÆs team manages around $3.6 billion in Asian equities. Overall, Manulife Financial manages around $4.3 billion in equities portfolios in this region.

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?

Pasha: We see opportunities among those areas that are likely to benefit from a concerted easy money policy by global central banks such as Hong Kong properties, Hong Kong banks, Singapore properties and Malaysia financials.

We see super cycles in coal, industrial materials, agricultural and carbon commodities, Asian consumer credit and Asian infrastructure plays such as China industrials and are positioning ourselves accordingly. We also expect to see cycle inflexions or recoveries in the technology sector and in Thai financials. Meanwhile, we also see falling political risk premia in Korea and Thailand in 2008.

Overall, we think that value will outperform growth, and that price momentum will outperform earnings momentum because of rising forecast uncertainties.

Have you made any significant changes to your asset allocation in terms of markets or sectors in the run-up to the coming year?

No. We think that the run-up to the Chinese New Year will be a more important milestone for equity markets. We think there will be a second potential hazard point from the second quarter reporting around May through the Olympics.

What are your favoured markets in Asia?

Korea. We believe that there are good valuations in the market and a return of strong growth prospects. The country should also benefit from lessening political risk, an exposure to the technology cycle as well as from long order backlogs.

Taiwan. We think that the technology sector looks very compelling as it is on a cycle upturn. Taiwan should be a natural beneficiary.

Thailand. Our view is that there are some significant valuation opportunities in Thailand and that we are likely to see earnings upgrades in 2008. We also expect the stock market to benefit as political risk in Thailand lessens.

Japan. Japan has been experiencing historically low valuations and this presents some interesting opportunities. We also think it will benefit from the reversal of the foreign exchange carry trade, and that 2008 may herald some positive earnings surprises.

Hong Kong. Hong Kong benefits from a strong liquidity impetus thanks to the Hong Kong dollar peg. We also expect to see returning asset price inflation thanks to capital flows from the mainland in 2008.

What are the markets you are going to steer clear of in the coming year?

We are underweight in China, Indonesia and India, largely due to concerns about valuations. We also think that Singapore has high valuations and also that there will be pressures on growth in the country in the coming year. We are also concerned about continuing political instability in Pakistan which is leading us to an underweight position there too.

What are your market weightings within an Asia ex-Japan equities portfolio?

China - Neutral
Hong Kong - Overweight
India - Underweight
Indonesia - Underweight
Korea - Overweight
Malaysia - Overweight
Philippines - Underweight
Pakistan - Underweight
Singapore - Underweight
Taiwan - Overweight
Thailand - Overweight
Vietnam - Overweight

Which sectors do you expect to underperform?

We expect to see underperformance in Chinese consumer sectors, due largely to extremely high valuations and earnings delivery risks. We are also avoiding structurally slow growing sectors such as utilities in Hong Kong. Meanwhile, we are cautious about the high valuations in the health care sector and oil and gas producers in the region, many of which are at full production and are likely to be impacted by price risk. We are also wary of petrochemicals which we believe are reaching the peak of their business cycle.

What are the main challenges that you expect to face in the coming year?

There are clearly some policy challenges facing local central banks in the region and in particular, the risk of excessive tightening by China continues to be a concern. We also think that the risk of global recession will weigh on the markets in the first half of the year as ongoing global financial concerns continue to play on the minds of investors. Meanwhile, increased protectionism before and after US elections is also likely to have an impact on Asian markets in 2008.
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