Colin Ng is the regional head for Asia-Pacific equities at MFC Global Investment Management, the asset management arm of Manulife Financial. Hong Kong-based Ng oversees the Asian funds desk, which is responsible for managing equity investments in Asia-Pacific ex-Japan.
Ng has over 15 years of experience in the fund management industry. Before joining MFC Global, he was head of Asia ex-Japan equities at UOB Asset Management in Singapore and was also a member of the executive management team.
He shares with AsianInvestor his views about Asian equities.
Looking at a one-year period or beyond, what is your outlook for Asian equities?
Ng: We are beginning to see some discrimination emerging in the markets, different sectors and businesses are starting to demonstrate their ability to either recover more quickly or improve their cost competitiveness. Various Asian governments have played a significant role in easing the economic downturn by implementing easy monetary policies and pump-priming domestic economies through large infrastructure projects and tax incentives since late last year, which will begin to filter into the real economy by second half this year.
Generally, recent economic data throughout the region have shown signs of stabilisation. Asian economies may have bottomed, as we saw a higher PMI in China in consecutive months and Korea's GDP was flat sequentially, which was encouraging. Coupled with the US addressing its financial sector woes, risk aversion has reduced substantially as investors have felt more certain. We believe that the US economy will take time to recover as US banks gradually resolve credit woes. US consumers will be cautious to overspend again, and Asian economies will have to rely on other engines of growth than exports.
Compared with 2008 where Asian equities suffered a horrendous 50% decline, 2009-2010 will certainly look brighter as much of the negativities are already priced. Expectations are low currently, and every piece of positive development or data points will instil more confidence to the current volatile markets.
What are the biggest opportunities that you see in the coming 12 months?
We believe the equity asset class presents a favourable opportunity on a risk-return basis over the next 12 months.
We favour the oil and gas sector, as we believe reflation will drive demand for energy. We are also seeing encouraging indicators in the technology sector, such as increasing demand for LCD televisions, smart phones and netbooks. We should see a lifting of sentiments for Asian banks due to attractive valuation, while we are also concerned with a deteriorating credit cycle and we will invest in well-capitalised financial institutions. Defensive sectors such as utilities, telecommunications and consumer staples will generally lag in performance during periods of recovery.
What do you think of Asian equities valuations at the moment?
Investor optimism has increased markedly since March as Asian economies showed signs of stabilisation and bottoming. Corporate earnings results for the first quarter were generally better than expectations and better than last year's fourth quarter.
Significant equity price appreciation in March and April has led the market price-to-book ratio (PBR) to reach about 1.4 times on the MSCI Asia ex-Japan Index, which is below the ten-year average of PBR 1.8 times, according to Citi Research. We believe investors should take a longer-term investment perspective of Asian equities as this region is still the fastest-growing region in the world, particularly China and India, has favourable demographics, huge government reserves and potentially higher scope for GNP-per-capita.
What are the biggest challenges that you expect to face?
The credit cycle, particularly in Asia, seems to be at an early stage rather than late stage, and there will be more companies unable to fulfil financial obligations in Asia, especially smaller companies where credit is tight.
We believe unemployment, although a lagging economic indicator, is still a big issue in Asia and can potentially derail conditions.
How has your view of Asian equities changed, if at all, since the end of 2008 when investor sentiment was generally gloomier?
Investors' risk appetite has certainly improved significantly. There is a fair amount of optimism and especially recent favourable economic data has pointed to signs of stabilisation. We would like to see a further contraction in credit spreads, because without normalisation in this area, equity market performance will not be sustainable. Market volatility continues meanwhile.
How has the swine flu affected your investments, if at all?
Swine flu does not have the same devastating effect as Sars so an outbreak will not nearly have the same economic effects. Asia is more prepared to handle this situation in terms of prevention and reducing widespread transmission of the virus.
While the seriousness of this virus should not be underestimated, we expect the swine flu or more accurately Type-A H1N1, to have a less severe economic impact than Sars.
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 in January, we 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.
What are your favoured markets in Asia?
We still favour the cyclical markets in Korea and Taiwan. As we position portfolios, the cyclicals will have the highest leverage in terms of return. Both markets were the most unloved during the crisis. Taiwan will get an extra boost from improving the cross-straits relationship with China, and this is expected to have long-term positive implications for Taiwan. This is analogous to how Hong Kong benefited from the CEPAs.
We also like Singapore although the market thinks that it is most exposed to an external slow down. Its government stimulus economic package will help to alleviate some of the pains of its economic downturn. The opening of the two Integrated Resorts in due course is expected to provide a kicker to the country's economy, in terms of tourism and employment. We believe these impacts have not been factored by the market.
What markets are you bearish over?
We believe Asia is still the global growth region in the long term and there's a lot of potential to be uncovered in this region. However, in the short-to-medium term, we expect Malaysia, Thailand and the Philippines to lag their peers.
What is your investment criteria? Has your criteria changed since the onset of the global financial crisis?
Our investment criteria centre around three main areas. Valuation -- we basically buy growth at reasonable prices; thematic -- if the stock has a theme that will become a major trend in the market; high alpha rank -- if the stock comes out strongly in our quant screening. In more simple terms, we like stocks with growth, trading at reasonable valuations, with healthy balance sheets and supported by positive medium/long-term catalysts or themes.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
The key risks to watch out for are regulatory risks and policy implementation risks. We manage this risk by tapping the ground and through intelligence support from our territory offices in the region -- China, Singapore, Indonesia, Malaysia, Thailand, the Philippines, and Vietnam. Therefore, we are very well positioned in monitoring such risks and mitigate the impact should the undesirable events occurred.