Singapore family office cuts emerging Asia exposure
Singapore-headquartered single-family office KMXK Investment has turned bearish on emerging Asia, slashing its allocation from what its portfolio manager, Qihang Tan, describes as a “model allocation” of around 30% to less than 5% of its portfolio.
Even Vietnam, which Tan said was one of the most promising emerging Asian markets, has been targeted by KMXK for reductions in the family office’s allocation.
“Vietnam, in particular, is one place where we’ve been cutting our allocation since April,” Tan told AsianInvestor.
“In Thailand, we had already held our horses since before the [May general] election. Our teams in Vietnam, Thailand and the Philippines are taking a more conservative approach and trimming our positions. It’s really very tough.
SHORT-TERM PAIN, LONG-TERM GAIN
“A long-term view of emerging markets is still very sound for institutional investors like us, but on the short end of the curve there’s a lot of volatility, so emerging markets in the short run will be too high-risk for us,” he said, adding that KMXK diverted most of the funds to cash and treasuries.
KMXK Investment
Tan identified the by-now familiar headwinds of high interest rates and geopolitical tensions between China and much of the rest of the world as factors behind KMXK’s increasingly cautious approach to emerging Asian markets.
He also sounded a note of caution on the broader macroeconomic environment, suggesting that China’s economic woes could spill over in a contagion effect similar to the way in which the global financial crisis spread from its source in the US in 2008.
“China, as the ‘big brother’ and the biggest consumer, is suffering, and I think it’s sending shockwaves out,” he said. "We’re hearing chatter from China that things aren’t looking too good. The youth unemployment rate is not actually 21% [as Chinese government statistics say] but more like 40%. Signals like this that are coming out suggest it's not all rosy in Asia now.”
Tan also said that high interest rates in the US presented a risk with implications for emerging markets.
“The [inverted] two-year and 10-year US treasury yield [curve] has proved in the past that a recession is impending, and whether or not there’ll be a soft landing or not is a very big question mark,” he said. “Emerging markets depend on their big brothers for business, and if their big brothers aren’t doing well, they won’t do so well, either.”
POLICY PLAY
However, Tan said he saw investment opportunities in the longer term in emerging Southeast Asia, particularly in Vietnam, but also in the Philippines and Thailand, adding that KMXK’s strategy was highly policy-driven.
“Vietnam has central government policies involving infrastructure building, and they’re asking a lot of nations across the region for money. GIC is one of those that are bringing funds in to help develop Vietnam,” he said, referring to the Singapore sovereign wealth fund.
“I think it’s important to identify where the ‘big boys’ are throwing their money,” he explained. “This is key when we look at emerging markets, because infrastructure involves two- or three-year projects, so that’s the kind of stability we need.”
Tan also said that KMXK has leveraged government policy to invest in a solar farm in the Philippines. The firm is invested for the long haul, Tan said, having identified energy as in insufficient supply in emerging Asian nations.
“We believe that across emerging markets, energy is something that’s lacking, because they need to boost productivity and energy is key,” he said.
FOCUS ON NEEDS
He said KMXK’s investments in emerging Asia were not only policy-driven but also needs-driven, and, alongside energy and infrastructure, he identified food, materials and water as focus investment areas through which KMXK was looking to expand its emerging market presence beyond Southeast Asia to India, Latin America and potentially Africa.
“Water is a resource for crops, especially during droughts, so we’re looking at agritech for farmers,” he said. “India is very interesting because of this particular issue. We’re looking at [investing in] an irrigation system that detects whether crops are getting enough water. The things we’re looking at are very, very interesting, and we’re still exploring.”
He said KMXK had been looking at Mexico and Brazil as other emerging markets in which to seek long-term gains.
“We’re proceeding very, very cautiously,” he said. “How we get in will probably be through a fund model and one of the big institutions that has exposure. These are two countries that we feel – especially Mexico – will be the biggest beneficiaries of manufacturers pulling out of China.”
As for Africa, Tan said the continent presented opportunities over an even longer time horizon.
“Africa is very, very exploratory for us, but it’s a place I think will be the ‘next Asia’ in 10 years,” he said. “We’ll begin with South Africa to see what the needs are, and hopefully in the next three years we’ll be able to start something.”