This is part of a mid-year AsianInvestor series on the investment outlook of fund managers with Asian equity 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 manages around $109.2 billion in assets worldwide, including around $2.24 billion Asian equity ex Japan portfolios.
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?
The best countries to gain exposure to these secular trends would be India, Indonesia and China. Rising consumerism on the back of a rapidly emerging middle class and growing disposable incomes will provide numerous opportunities for investors over the next few years.
The growth environment in India will benefit tremendously from a rapid infrastructure build out. Post election, India could finally see more efficient policy making that enables the country to close the huge infrastructure and fixed asset investment gap with China.
Greater economic and financial cooperation between Taiwan China and Hong Kong could facilitate the ascent of the greater China block and provide major investment opportunities for investors. We are well-positioned in attractively valued Taiwanese asset plays and financial companies which we expect to perform well over the coming year.
How different or similar is your 12-month investment outlook now compared to the start of this year?
In the first quarter we maintained a defensive allocation within the region and have more recently increased our exposure to economically sensitive sectors including materials, consumer discretionary and most significantly in financials. We continue to emphasise individual company fundamentals with a clear focus on cash flow generation, balance sheet strength and a sustainable business franchise. We are cautious of the some of the low quality stocks that have characterized the initial phase of the market recovery which has favoured companies with highly geared balance sheets that have avoided risk of bankruptcy or recapitalisation.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
At a country level, we have moved to a significant overweight in Indonesia where we added to stocks in the financial and consumer discretionary sectors. Indonesia's strong and resilient economic growth profile driven by domestic demand, successful debt reduction and falling interest rates make this market appealing. The banks here are well capitalized with one of the highest growth potentials in Asia. Since the start of the year we have been selectively building exposure in India as we migrate to a benchmark that is now inclusive of India. We added to domestic Indian stocks in telcos, autos, building materials and consumer staples - valuations on our proprietary global emerging markets database have turned supportive in India after several years and the economy remains relatively insulated from the global recession. To fund these moves, we have cut our overweight exposure to China following strong performance over the start of the year.
At a sector level for the portfolio in aggregate, we have been emphasising early cyclical and domestic stocks, including financials, industrials and consumer discretionary which are beneficiaries of incredibly low interest rates prevailing in Asia and also of fiscal stimulus programs being pursued aggressively by governments in the region.
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?
The major lesson learned is that the interconnectedness of the world financial system can - in the acute phase of a credit crisis and liquidity shortage - overwhelm strong country, currency and valuation support levels. This was evidenced by the poor performance of South Korean assets over the second half of 2008 and early into 2009.
How has your view of Asian equities changed since the start of 2009 when investor sentiment was generally gloomier?
The Chinese stimulus program has had a clear impact on domestic demand reflected in a recovery in industrial production and continued robust fixed asset investment. China's growth prospects have stabilized as a result albeit at a lower trajectory of 7% to 8% growth from a previous range of 9% to 11%.
The unprecedented credit expansion witnessed in China - with M2 and loan growth expanding 25% to 30% year-on-year - could create positive inflation impulses by the fourth quarter of this year.
Domestic growth prospects in India appear to be improving post the election results, underpinned by a more efficient policy making scenario which had previously been hamstrung by coalition issues.
How has the swine flu affected your investments?
There has been no impact on our investment strategy. We continue to monitor the situation carefully with the help of our in-house healthcare experts.
What are your market weightings within an Asia ex-Japan equities portfolio?
China - 27.7%
Hong Kong - 13.4%
India - 9.2%
Indonesia - 4.2%
Korea - 21.6%
Malaysia - 1.0%
Pakistan - 0
Philippines - 0.1%
Singapore - 2.6%
Sri Lanka - 0
Taiwan - 16.5%
Thailand - 2.1%
Vietnam - 0.7%
*These positions are from a representative account.
What are your favoured markets in Asia?
Our portfolio strategy is driven by our valuation and fundamental led stock selection methodology. Our current overweight policy in Indonesia, South Korea, China and Taiwan excluding IT reflects an attractive number of valuation opportunities coupled with strong fundamentals in these markets.
What are the markets you are going to steer clear of in the next 12 months?
We find relatively few valuation opportunities in Singapore and Malaysia and as a result have a below benchmark allocation to both countries.
Which sectors do you expect to outperform in the next 12 months?
Our portfolio strategy is orientated towards domestic sectors like financials - banks, real estate, building materials, infrastructure plays - notably in India and China and also selective cyclicals in metals, energy and IT which show a strong valuation case alongside a sustainable business franchise.
Which sectors do you expect to underperform?
The results from our valuation and fundamental stock selection methodology are currently leading to an underweight policy in the utility, healthcare and consumer staples sectors.
What are the main challenges that you expect to face in the coming 12 months?
Asian stocks have risen an impressive 57% in just over three months - the sharpest rally on record over such a short period. On the positive side, global liquidity conditions remain supportive and the structural growth differences between Asian and developed markets are becoming increasingly apparent. Offsetting these factors are valuation levels which on a price-to-book basis for Asia have moved back to in line with developed markets and the continued uncertainty over the outlook for industrial production growth post the current phase of inventory re-stocking. Asian market performance may be moving into a more volatile phase over the coming months as these factors play out.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
For the region as a whole, post this financial crisis, capital and trade flows may not circulate as freely as before. Asia will have to depend on more domestic drivers of economic activity as a result to sustain attractive levels of trend growth. This transition towards a region led by consumption not investment will take time and will not protect the region should consumer demand across developed economies show little meaningful recovery in the second half of 2009.
A continued escalation in energy and other commodity prices may raise the spectre of higher interest rates across the region as witnessed in early 2008.
These risks are managed through our disciplined bottom-up valuation and fundamental appraisal of stock holdings in our portfolio reinforced by extensive company contact. Our bias towards companies with domestically orientated franchises helps the visibility of growth for our fund.