This is part of a mid-year AsianInvestor series on the investment outlook of fund managers with Asian equity portfolios.
Jan de Bruijn is an Asia-Pacific equity fund manager at Threadneedle Asset Management. He manages the fund house's institutional portfolios and the long/short Asia Crescendo Fund. He has country responsibility for generating the Korean and Taiwanese stock ideas and specialises in the technology sector, for which he is the fund house's global sector head.
Threadneedle manages around $67 billion in assets worldwide, including around $3.4 billion in Asia ex-Japan equities.
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?
|Jan de Bruijn|
de Bruijn: Evidence of a stabilisation or recovery in economic growth is feeding through to a strong profits growth recovery in areas such as IT. This sector has also undertaken significant cost cutting over the past 18 months, leaving it operationally geared to any upswing in activity. On a longer term basis, the Asian structural growth story continues to be a strong regional theme, driving earnings in building, construction and consumer-related sectors. These are among our key overweights.
How different or similar is your 12-month investment outlook now compared to the start of this year?
At the turn of the year we were much more cautious on the outlook for economies and markets. While we still think that the global economy is set for a lengthy period of sub-trend growth, we are now past the worst point of decline and this has driven a sharp improvement in sentiment. We are now positioning portfolios more towards cyclical recovery and growth as well as the structural themes highlighted above.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
Changes to the portfolio since the start of the year have been principally driven by the themes I cited. Thus, key moves include additions to the consumer discretionary, IT and financials sectors and a reduction in the relatively defensive telecoms sector. It has been a similar story geographically, where we have reduced the position in the defensive Australian market and added to South Korea, principally via banks and IT stocks.
What are the greatest lessons you have learned from the global financial crisis and how will this affect the way you manage your portfolios?
The greatest lesson learnt from the global financial crisis is that the traditional methods of measuring risk in the financial sector were of limited use in calculating how leveraged a financial company truly was, nor were they able to tell you the true exposure of a financial institution to high risk packaged products. Much was off-balance sheet making it very difficult to get a clear handle on the risk profile. Regarding how this affects the managing of the portfolios going forward, there will be more focus in management meetings on off-balance sheet items and increased awareness of the type of leverage a financial institution is running. In addition the crisis also resulted in trade finance problems fro some companies, and so there will also be more focus on getting a more detailed grasp of a company's exposure to trade finance
How has your view of Asian equities changed, if at all, since the start of 2009 when investor sentiment was generally gloomier?
Overall, we are more positive than we were at the start of the year, based on signs of economic stabilisation/recovery, improved liquidity and fund inflows.
How has the swine flu affected your investments?
Swine flu has not affected our strategy.
What are your market weightings within an Asia ex-Japan equities portfolio?
As of May 31, 2009 the portfolio was broken down as follows:
China - 23.2%
Hong Kong - 14.1%
India - 6.1%
Indonesia - 2.3%
Korea - 13.9%
Malaysia - 1.1%
Pakistan - 0.1%
Philippines - 0.5%
Singapore - 5.6%
Sri Lanka - 0%
Taiwan - 14.3%
Thailand - 1.3%
Vietnam - 0%
What are your favoured markets in Asia?
The biggest overweights are in China and Hong Kong. We remain positive on the long-term structural themes driving the Chinese market. The recent stimulus has proved successful in supporting growth and will underpin demand in infrastructure-related sectors such as construction and commodities. The consumer theme is also very much intact, driving earnings in areas such as retail. Our Hong Kong holdings are focused on companies supplying Chinese demand and on the financials sector, where low interest rates have created robust demand for property. We are also overweight in Taiwan, where improving cross-straits relations are likely to lead to increased inward investment by Chinese investors.
What are the markets you are going to steer clear of in the next 12 months?
The most significant underweight is Australia, which is a more developed market with inferior long-term growth potential.
Which sectors do you expect to outperform in the next 12 months?
As mentioned above, we are overweight in IT and financials as we believe that these sectors are about to embark on a cyclical earnings recovery. We are also overweight in consumer discretionary areas, whose earnings are underpinned by the long-term theme of increasing consumption in the region.
Which sectors do you expect to underperform?
We are underweight in consumer staples and utilities as these sectors' defensive qualities are likely to be less in demand as economies begin to recover. Industrials is a very diverse sector and we will place more emphasis upon the non-export related stocks.
What are the main challenges that you expect to face in the coming 12 months?
Strong recent runs in a number of stocks have created the scope for a period of consolidation or correction. We need to remain vigilant on our price targets and must be prepared to take profits and recycle into other areas.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
The markets have come a long way on improved sentiment and tentative signs of economic recovery. Even if a recovery is genuinely underway, we are likely to see disappointing data points on economies in the coming months and this may cause volatility. We are addressing this by maintaining holdings in high quality, undervalued defensives (such as Telstra of Australia) in addition to our more cyclical positions. We remain positive on the outlook for Asia and will use any forthcoming volatility to add to long-term growth stocks at more attractive levels.