This is part of a mid-year AsianInvestor series on the investment outlook of fund managers with Asian equity portfolios.
Colin Ng is the Hong Kong-based regional head for Asia-Pacific equities at MFC Global Investment Management, the asset management arm of Manulife Financial. He oversees the Asian funds desk, which is responsible for managing equity investments in Asia-Pacific ex-Japan. He has over 15 years of experience in the fund management industry.
MFC Global manages around $18 billion in Asia, including around $5.7 billion in equities. Globally, MFC Global manages around $228 billion in assets.
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?
We will take advantage of any market weakness to further increase our exposure to quality growth stocks with earnings turnaround, some businesses have demonstrated their ability to either recover more quickly or improve their cost competitiveness. In terms of sectors, energy, financials, and infrastructure-related companies continue to present good prospects in the current recovery.
We believe economic recovery will drive demand for energy. We should see a lifting of sentiments for Asian banks due to attractive valuation, and especially for Chinese banks an increase in net interest margin and loan growth. While we are also concerned with a deteriorating credit cycle, we will invest in well-capitalized financial institutions. Investing alongside the Asian government's economic stimulus, infrastructure-related companies will benefit potentially from a much larger order book.
We are also seeing rotational interest back to the technology sector, which has lagged in the recent two months. The strong sales in 3G iphone will be positive for the smart phones' food chain.
Systemic risks associated with the US financial institutions have been fairly contained and the concern of a global depression is a less likely scenario at the current juncture. We believe the US Fed Reserve will maintain its quantitative easing stance and keep short term interest rates low until a sustainable US economic recovery. Recent economic data throughout Asia have shown signs of stabilisation. We saw encouraging rebound on leading indicators such as the China PMI (purchasing managers' index), Korea business sentiment index and Taiwan business climate index.
Structurally, Asia economies are in healthier positions now than during the Asian financial crisis in 1997; corporate balance sheets are much stronger and banks have the ability to lend to support further growth. While exports may not be the engine of growth in the near-term, various Asian governments have played significant role in easing the degree of economic downturn by implementing easy monetary policies and pump-priming domestic economies through large infrastructure projects and tax incentives, which should be filtering into the real economy by second half of this year. Economic growth will be gradual, as I do not envisage a strong V-shape recovery, and for equities to sustain its upward trend, corporate earnings will have to improve.
How different or similar is your 12-month investment outlook now compared to the start of this year?
At the beginning of year, the markets were very cautious and pricing in high risk premium due to many uncertainties. Valuation of Asian equities on a price-to-book basis was much more attractive at 1.2 times.
Since then, there has been a fair amount of optimism over the past few months, underpinned by recent favourable economic data. Leading indicators are pointing to signs of stabilisation. Investors' risk appetite improved significantly and we witnessed decent gains, especially from cyclical stocks in the recent run-up. While markets may need to digest its recent gains in the near term, I reckon equities can continue to generate decent returns over next 12 months.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
Seeing that stocks were grossly undervalued back in January, we have gradually raised the beta of our portfolio in the past few months. We have increased exposure to Korea and Taiwan - the worst hit markets during this crisis and raised weighting in tech names, financials, and property stocks across the region. At the same time, we reduced our holdings in defensive and unattractively valued consumer staples and telecoms. We were also overweight in Indonesia and Singapore within South East Asia, but have been paring down positions lately, taking some profit.
What are the greatest lessons you have learned from the global financial crisis and how will this affect the way you manage your portfolios?
Every crisis is somewhat different. Global markets are more intertwined than before and while no market can insulate itself from the US financial meltdown last year, every crisis does present opportunities. As a money manager, we need to stay focused, objective and manage risk well.
How has your view of Asian equities changed since the start of 2009 when investor sentiment was generally gloomier?
Investors should take a longer term investment perspective of Asian equities as this region is still the fastest growing region in the world, particularly with China, India and Indonesia which have favourable demographics and potentially higher scope for GNP-per-capita and growth.
There were concerns on how Asia will deal with a sharp contraction in exports to US and Europe. We believe Asian governments and domestic spending will have to fill the slack in the meantime. Asian corporates will have to stay cost competitive, and several Asian companies have already demonstrated their resilience, capturing market share in times of adversity - for example, Hyundai Motor taking a bigger market share in the US auto industry.
How has the swine flu affected your investments?
The impact on our investments has been very limited. While it is clearly a serious health concern that should not be underestimated, from an overall investment perspective, we expect the Type-A H1N1 swine flu to have a limited impact. This is because this virus has been identified early and the WHO as well as governments of various countries have acted swiftly to contain the spread of this virus. Furthermore, H1N1 is treatable. Hence, profitability for the airline and hospitality industries is likely to only be adversely affected in the very short-term.
What are your market weightings within an Asia ex-Japan equities portfolio?
China - overweight
Hong Kong - underweight
India - underweight
Indonesia - neutral
Korea - neutral
Malaysia - underweight
Pakistan - N/A
Philippines - underweight
Singapore - neutral
Sri Lanka - N/A
Taiwan - overweight
Thailand - neutral
Vietnam - N/A
What are your favoured markets in Asia?
On a 12-month time horizon, we believe China will continue to perform well as the country has demonstrated high level of fiscal and monetary flexibility. The emergence of the urban middle class will also drive domestic consumption higher. Taiwan will get the extra boost from improving cross-straits relationship with China and this is expected to have a long-term positive implication to Taiwan.
What are the markets you are going to steer clear of in the next 12 months?
We believe Asia is still the fastest growth region and once global economic growth resumes, this region will be well-positioned to further extend its growth potential. However, we expect Malaysia and the Philippines to lag its peers. For both countries, we see a relatively weaker recovery in corporate earnings, lagging consumption and slower implementation of fiscal stimulus.
Which sectors do you expect to outperform in the next 12 months?
We favour the oil and gas sector, as we believe reflation will drive demand for energy. We are also seeing rotational interest back to the technology sector. We should see a lifting of sentiments for Asian banks due to attractive valuations, but we are also concerned with a deteriorating credit cycle, and we will invest in well capitalised financial institutions.
Which sectors do you expect to underperform?
Defensive sectors such as utilities, telecommunications and consumer staples will generally lag in performance during periods of market recovery, as these sectors have outperformed during the bear market.
What are the main challenges that you expect to face in the coming 12 months?
We expect market volatility to continue. Asian equities have outperformed since March, led largely by the cyclical stocks. Markets need to digest these gains in the near term. We believe corporate profitability will improve in the latter half especially given a low base effect, and hence should sustain equity valuation.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
We continue to monitor economic developments in the US. There are some concerns about US commercial real estate, especially with the decline in real estate prices and that refinancing could post a challenge. For Asian exports to pick-up, US consumers need to spend again after recent deleveraging and the housing market woes may mean US consumers continue to be more reticent to part with their cash for some time.
High oil prices above $100 per barrel may derail economic recovery, but our portfolio is well-positioned in the energy sector.