Pictet AM market outlook remains guarded
Investment Outlook Series: Nidhi Mahurkar, a portfolio manager at Pictet Asset Management, says the fund house is underweight on economically cyclical sectors.
This is part of an AsianInvestor series on the investment outlook of fund managers with Asian portfolios.
Nidhi Mahurkar is the London-based co-head of the global emerging markets equities team at Pictet Asset Management. The team is in charge of investment in Asia across global emerging markets and regional Asian mandates.
Pictet Asset management has around $128.4 billion in AUM worldwide, including around $4.8 billion in Asian portfolios.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months? If yes, what are the major changes?
Mahurkar: There have been no major changes to sector or country allocation over the past two to three months. Looking back a little further, after the strong relative performance of our Taiwan positions over the first quarter, we were paring back exposure at the margin from our previously aggressive overweight position.
We remain believers in a permanent risk premium reduction in this market and retain overweight positions here. We continued culling portfolio exposure in China in January and February having moved to underweight at the start of the year. The key issues we saw at that time were inflation, tightening bias, weakening property sector, high valuations and exposure to weak external demand. We also took profits in interest rate sensitives in Hong Kong financials on declining transaction volumes in the property sector.
More recently, at a stock level, we initiated a large active position in a Taiwan technology company û Hon Hai û at a three-year valuation low. While fundamentals remain challenging in technology stocks in the current macro environment, we believe the companyÆs vertical integration and strong execution will enable it to deliver on revenues and earnings.
What are your favoured markets in Asia?
At a country level, preferred and overweight markets are Taiwan, HK, South Korea, and Thailand. Positions here are largely driven as a result of our bottom up methodology which focuses upon a distinctive valuation appraisal at a capacity level combined with a rigorous analysis of company fundamentals. We also have some opportunistic positions in India û a market progressively becoming more interesting given the heavy falls witnessed so far over 2008.
We are currently underweight Malaysia, Indonesia and China where valuation and margin issues persist.
What are your market weightings within an Asia ex-Japan equities portfolio?
China: 20.7%
Hong Kong: 16.3%
India: 0.2%
Indonesia: 2.7%
Korea: 21.6%
Malaysia: 2.3%
Pakistan: 0
Philippines: 0
Singapore: 5.9%
Sri Lanka: 0
Taiwan: 23.5%
Thailand: 2.3%
Vietnam: 0.2%
The reference fund has the MSCI Far-East ex-Japan index as its benchmark.
Which sectors do you expect to outperform in the coming year?
Given our less than optimistic near-term scenario on the global environment, the portfolio will remain overweight in domestic demand sectors û consumer staples, financials and telecom service and underweight economically cyclical sectors like consumer discretionary and industrials. We like market leading Taiwan tech exporters underpinned by strong demand from emerging markets, where we have been raising allocations.
What are the main challenges that you expect to face in the coming 12 months?
Energy prices and inflation outcomes hold the short and longer term key to stock market performance in the region. With several economies reporting inflation in double digits, the risks of past monetary policy laxity coming home to roost are higher. This is indeed the biggest acceleration in inflation faced by the region since the Asian crisis due in part to surging oil and other commodity prices. Unlike the west, since energy and food account for large shares of consumer budgets in much of Asia, they do influence inflation expectations. Our market outlook remains guarded over the summer and positioning remains underweight economically cyclical sectors.
The current degree of pessimism should not obscure the long-term secular attractions of the Asian markets. Robust government, corporate and consumer balance sheets are shielding many Asian economies from much of the forced de-leveraging affecting developed markets. It is also providing the support for rising consumption and the build out of huge infrastructure programmes across Asia. Further weakness will present investors with an unusual opportunity to buy into emerging franchises which are benefiting from these secure trends.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
Increasing commodity prices are putting at risk the ability of many Asian economies to repeat stellar rates of growth. Central banks across the Asian countries are tightening monetary policy to prevent soaring food and fuel prices from getting entrenched into more generalized inflation. Interest rates are still below the rate of inflation for much of Asia (real rates average -1.7%) implying the need for further policy response. The performance of Asian emerging markets year-to-date implies that the markets do not have a high degree of confidence that this transition will be achieved without economic dislocation.
Nidhi Mahurkar is the London-based co-head of the global emerging markets equities team at Pictet Asset Management. The team is in charge of investment in Asia across global emerging markets and regional Asian mandates.
Pictet Asset management has around $128.4 billion in AUM worldwide, including around $4.8 billion in Asian portfolios.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months? If yes, what are the major changes?
Mahurkar: There have been no major changes to sector or country allocation over the past two to three months. Looking back a little further, after the strong relative performance of our Taiwan positions over the first quarter, we were paring back exposure at the margin from our previously aggressive overweight position.
We remain believers in a permanent risk premium reduction in this market and retain overweight positions here. We continued culling portfolio exposure in China in January and February having moved to underweight at the start of the year. The key issues we saw at that time were inflation, tightening bias, weakening property sector, high valuations and exposure to weak external demand. We also took profits in interest rate sensitives in Hong Kong financials on declining transaction volumes in the property sector.
More recently, at a stock level, we initiated a large active position in a Taiwan technology company û Hon Hai û at a three-year valuation low. While fundamentals remain challenging in technology stocks in the current macro environment, we believe the companyÆs vertical integration and strong execution will enable it to deliver on revenues and earnings.
What are your favoured markets in Asia?
At a country level, preferred and overweight markets are Taiwan, HK, South Korea, and Thailand. Positions here are largely driven as a result of our bottom up methodology which focuses upon a distinctive valuation appraisal at a capacity level combined with a rigorous analysis of company fundamentals. We also have some opportunistic positions in India û a market progressively becoming more interesting given the heavy falls witnessed so far over 2008.
We are currently underweight Malaysia, Indonesia and China where valuation and margin issues persist.
What are your market weightings within an Asia ex-Japan equities portfolio?
China: 20.7%
Hong Kong: 16.3%
India: 0.2%
Indonesia: 2.7%
Korea: 21.6%
Malaysia: 2.3%
Pakistan: 0
Philippines: 0
Singapore: 5.9%
Sri Lanka: 0
Taiwan: 23.5%
Thailand: 2.3%
Vietnam: 0.2%
The reference fund has the MSCI Far-East ex-Japan index as its benchmark.
Which sectors do you expect to outperform in the coming year?
Given our less than optimistic near-term scenario on the global environment, the portfolio will remain overweight in domestic demand sectors û consumer staples, financials and telecom service and underweight economically cyclical sectors like consumer discretionary and industrials. We like market leading Taiwan tech exporters underpinned by strong demand from emerging markets, where we have been raising allocations.
What are the main challenges that you expect to face in the coming 12 months?
Energy prices and inflation outcomes hold the short and longer term key to stock market performance in the region. With several economies reporting inflation in double digits, the risks of past monetary policy laxity coming home to roost are higher. This is indeed the biggest acceleration in inflation faced by the region since the Asian crisis due in part to surging oil and other commodity prices. Unlike the west, since energy and food account for large shares of consumer budgets in much of Asia, they do influence inflation expectations. Our market outlook remains guarded over the summer and positioning remains underweight economically cyclical sectors.
The current degree of pessimism should not obscure the long-term secular attractions of the Asian markets. Robust government, corporate and consumer balance sheets are shielding many Asian economies from much of the forced de-leveraging affecting developed markets. It is also providing the support for rising consumption and the build out of huge infrastructure programmes across Asia. Further weakness will present investors with an unusual opportunity to buy into emerging franchises which are benefiting from these secure trends.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
Increasing commodity prices are putting at risk the ability of many Asian economies to repeat stellar rates of growth. Central banks across the Asian countries are tightening monetary policy to prevent soaring food and fuel prices from getting entrenched into more generalized inflation. Interest rates are still below the rate of inflation for much of Asia (real rates average -1.7%) implying the need for further policy response. The performance of Asian emerging markets year-to-date implies that the markets do not have a high degree of confidence that this transition will be achieved without economic dislocation.
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