MFC Global says good dividend yields have helped

Investment Outlook Series: Tahnoon Pasha, head of investments for equities at MFC Global Investment Management, says many stocks now offer good dividend yields compared to cash rates.
This concludes our AsianInvestor series on the 2009 investment outlook of fund managers with Asian portfolios.

Tahnoon Pasha is the head of investments for equities at MFC Global Investment Management, the asset management arm of Manulife Financial Corporation. Based in Hong Kong, he oversees the management of the fund houseÆs Asian ex-Japan equity portfolios. With nearly two decades of equity investment management experience, he joined MFC Global in 2007. Previously, he was deputy CIO for emerging Asia and head of research for the emerging markets department of the Abu Dhabi Investment Authority (ADIA).

Pasha and his team at MFC Global manage around $2.1 billion in assets.

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

Pasha: The panic in markets is releasing most of the opportunities we see. The uncertainty in financial markets has lead to widespread selloffs in most sectors and asset classes. We are adding value through superior analysis, by identifying and investing in the victors in each market sector. When the market is reacting violently to surprises, we are trying to position ourselves in investments with a high possibility of positive surprises.

There are certain areas we think will benefit disproportionately. High government spending will support old economy cyclicals. Any traction in policy measures is likely to lend momentum to financial sector profits in Asia. We also believe that the emerging market consumer will become more prominent.

We think it likely that the recovery in emerging market consumption and low cost goods will be quicker than developed market and premium goods. We think companies that sell into this space will experience more resilient profits.

We also believe that there are now many stocks which give us such good dividend yields compared to cash rates that we are in effect paid to sit through the cycle. High yield plays are an area we think has a lot of appeal.

How has the global financial crisis affected the way you manage your portfolios?

We are obviously more cautious. Higher volatility is giving us more opportunities to buy cheap, but more risks of error too. We focus on cash cycles and short term funding more in our analyses, and typically spend more time reviewing balance sheets and contingencies than in the past.

We find that investors are much less forgiving of company management that disappoint or are less than transparent about their businesses. We think it is especially important to speak to management at this time since the landscape is shifting so rapidly for most industries.

We have adjusted down our trend growth assumptions to take into account the fall-out from the crisis itself. This is reflected in our more sombre outlook for the global consumption cycle in 2009.

What is the biggest lesson you have learned from the US credit crisis?

Investors are re-learning old lessons about the costs of excess, and the normal rate of return on equities.

We are leveraging our regional footprint more aggressively as the reliability of consensus information is questionable. We believe the network effects of a global market and the implications for price volatility were not well understood. The extent to which the global economy is inter-connected has been made very apparent by the rolling recessions we have seen in asset classes and geographies.

We believe that correlations between asset classes are less relevant to decision making now, than correlations between business streams. We think specialisation will be more successful for businesses than consolidation at this stage in the cycle.

Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?

We have added to Taiwan, Singapore, Hong Kong and China. We believe that policy options are widest in these nations, the mix of sectors and the competitive standing of businesses in those sectors is most attractive in these countries.

We are underweight emerging South East Asia, where investor appetite is lower, policy response more muted, and political and sovereign risk slightly higher.

We are finding value in the technology leaders, especially downstream low cost business and consumer providers. We also think some resource companies are now selling at large discounts to the value of their assets, and we think some financials have been oversold.

We are generally funding from the consumer discretionary sector.

What are your favoured markets in Asia?

We like China for the extent and conviction of its policy response as well as the long-term secular theme. We like Singapore as a safe haven in Southeast Asia, which will benefit from portfolio flows. We believe that the property and oil & gas sectors are especially oversold there.

We think that Taiwan is attractive longer term, with strong companies, and benefits from improved political relationships. We still see some vulnerability in short term earnings announcements however.

What markets are you bearish over?

We are underweight emerging Southeast Asia, where investor appetite is lower, policy response more muted, and political and sovereign risk slightly higher.

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

China - Overweight
Hong Kong - Overweight
India û N/A
Indonesia û N/A
Korea - Underweight
Malaysia - Underweight
Pakistan û N/A
Philippines û N/A
Singapore - Overweight
Sri Lanka û N/A
Taiwan - Overweight
Thailand - Underweight
Vietnam û N/A
Australia û Underweight
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