John Ford is the Hong Kong based CIO for Asia-Pacific at Fidelity International, which operates in markets outside the US.
Ford oversees Fidelity International's investment teams based in the region and investing across all markets in Asia-Pacific, from Japan to Australia and across to India. The fund house manages around $142 billion in assets in Asia-Pacific, Europe and the UK.
Ford shares with AsianInvestor his views about the Asian equity markets.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
What are the biggest opportunities that you see in the markets in the coming 12 months?
Emerging markets in Asia continue to provide attractive investment opportunities for investors. When compared to the rest of the world, the Asian region has performed extremely well in the current environment with the standouts being China and India as well as Indonesia. Increasing domestic demand is one of the key reasons behind the resiliency of Asian markets and, contrary to what we've witnessed in the West, Asia by and large hasn't been badly impacted by credit problems -- be it government, corporate or consumer debt - so the region continues to have a strong investment story for investors. Many of our portfolio managers believe that the prospects for further recovery have not been adequately priced into Asian equities, so a number of individual buying opportunities will continue to present themselves over the next 12 to 18 months.
How has your 12-month investment outlook now changed compared to the start of this year?
I haven't changed my view in the past year and but I have been surprised by the speed of this year's market rally. The market's rise has not entirely been driven by fundamentals and has been heavily influenced by foreign flows. The aggressive monetary easing we've seen in the West has seen cash being deployed from the sidelines and flowing to the most attractive investment ideas, with Asia being a prime beneficiary. According to some reports, Asian markets saw close to $10 billion in net foreign buying during the month of May so there is no doubt that Asia continues to be an attractive part of the world for foreign and local investors. Its growing share of GDP, the high savings rate in the region, and the changing demographics will continue to make the region more resilient than Western economies.
What are the greatest lessons you have learned form the global financial crisis and how will this affect the way you manage your portfolios going forward?
For investors, the downturn has certainly confirmed the fact that choosing an established asset management house with highly experienced portfolio managers, and a house that has an investment approach that has stood the test of previous crises, is absolutely critical. We have been operating for 40 years in Asia-Pacific, so we have a number of managers within our company who have first hand experience in managing money through tough economic conditions. Our more senior managers mentor our analysts and junior portfolio managers, so there is an important exchange of knowledge and experience that takes place every day. This has been invaluable when you look at the credible performance of our funds in these difficult times.
How has your view of Asian equities changed since the start of 2009 when investor sentiment was generally gloomier?
Recent economic data has encouraged investors to switch from the bear camp and the general view is that the worst of the downturn is over, especially when looking at the improvement in growth rates over the shorter-term.
We have already seen strong rebounds in the first quarter for China, Korea, India and Indonesia and a broader rebound in the second quarter is now forecast, driven by a pick-up in Malaysia, Taiwan, Thailand and Singapore. This is all due to improving and more positive industrial production and export data.
What are your favoured markets in Asia?
Economies likely to benefit from an improving domestic demand picture such as China, India and Indonesia are the markets to watch in the second half of 2009.
Indonesia has been one of the best performing markets year to date, starring alongside China and India, it's the world's fourth largest country by population, the third fastest growing economy in the region behind China and India and it's not heavily reliant on exports. From our perspective, there are a number of potentially attractive investment opportunities, particularly now that we appear to be set for an extended period of political stability following the recent presidential elections there.
China continues to be the engine of growth for the region. We envisage a multi-decade consumer boom for China, underpinned by a series of secular factors -- besides the shaping up of a social security system -- such as individual wealth accumulation, urbanisation, and emergence of Chinese baby boomers. Many of our portfolio managers believe in this theme and are positive in the long-term on leading Chinese consumer franchises that command market share dominance and/or superior pricing power.
It's interesting to note that up until recently, investors weren't too focused on India. Instead, China took the limelight but the situation changed in mid-May following the unpredictable outcome of the Indian general elections and in the longer term, this strong government platform will create several opportunities. In addition, unlike a lot of other Asian economies, India has the advantage of being less exposed to the external environment and exports to GDP are around 12% compared to Korea at 39% and Taiwan at over 60%.
What are the markets you are going to avoid in the next 12 months?
There are no specific countries or markets to steer clear of but Korea is a market we will be monitoring closely for the remainder of the year. After an impressive broad based pick up in activity data during April, global demand is likely to be limited which will have implications for Korean exports. When compared to other Asian markets, Korea's household debt levels and its banking system's loan-deposit ratios are not as attractive.
Which sectors do you expect to outperform in the next 12 months?
We look for opportunities from a bottom up perspective but in the next 12 months, we are looking for those companies that will come out of this crisis in a better position than they went into the downturn. We favour those companies that are exposed to the domestic demand growth story as well as those industries that are likely beneficiaries of the stimulus measures and recent reforms announced by a number of Asian governments. The real estate, consumption, cement, insurance and healthcare sectors are some examples. We certainly have a bias for those companies that have good pricing power, companies that are dominant players and likely to gain more market share, and those that have strong balance sheets and solid management teams.
What are the main challenges that you expect to face in the coming 12 months?
There will be two key challenges in my view -- valuations are becoming more expensive so under-valued, quality stocks are becoming more difficult to find and the export dependency of some countries in Asia could be an issue.
With respect to valuations, whilst there are good opportunities still to be found, a number of stocks are now finding their true values and anomalies are becoming less frequent. Price to earnings and price to book ratios are no longer cheap versus their own historical levels or when compared to other markets around the world. For the region, 2009 price to earnings ratios are trading at 17 times while price to book ratios are trading close to 1.7 times which is quite high.
We also do need to be mindful of the weak outlook for advanced economies and the fact that Asia is heavily reliant on exports and yet to fully decouple from the rest of the world. As a result, many of our portfolio managers are investing in companies, industries or regions that have the ability to deliver sustainable domestic demand growth as they are in a healthier position than those dependent on exports.