Published July 27, 2009

Fund managers place their bets on Asian markets

But some wonder if fundamentals can support the surge

By NEIL BEHRMANN
IN LONDON

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FOREIGN fund managers are banking heavily on an Asian earnings upturn and continual growth in China to drive market momentum forward.

Following a lull, a sudden leap on Wall Street has boosted foreign investor interest in Asian markets. The psychology of the markets has changed from the fear of losing money to a fear of losing opportunities.

According to EPFR Global fund research, US$137.5 billion flowed out of money market funds and almost a fifth went into Asian and other emerging market funds in the second quarter. The trend has continued in recent weeks, although the size of inflows is subsiding.

MSCI Asia ex-Japan rose by 34 per cent year-to- date to July 24 and emerging Asia by 46 per cent in US dollars, but lower gains in euro and sterling. Credit Suisse said there are several positive fundamental factors which support foreign investment in Asia. First, Asia is expected to lead the global recovery due to its low leverage and financial flexibility to pump-prime economies. Second, China and India are growth engines. Third, emerging Asia is projected to deliver an average earnings recovery of 33 per cent in 2010, according to the Institutional Brokers Estimate System. Finally, company directors are signalling earnings upgrades.

Recovery leaders include companies which benefit from the massive fiscal stimulus packages in China and selected Asian countries, and technology companies with the largest potential earnings rebound. Credit Suisse advises investors to be overweight China, India and Taiwan,

The impressive market surge, however, has made it difficult to find equity bargains. The MSCI Asia ex-Japan index's estimated price-earnings ratio has risen to an estimated 15.5 in 2009 and 12.8 in 2010.

Some sceptics such as Simon Hunt of Simon Hunt Strategic Services caution that a mid-summer rally in equity markets is a common occurrence and is often followed by a sharp fall in the autumn.

'We keep asking ourselves the simple question: how can the biggest global crisis and recession since the 1930s be resolved in a matter of months?' says Mr Hunt. 'The collapse in Asian and global trade was a function of falling final demand and liquidation of bloated inventories.'

The Asian stockmarket boom has been a boon to fund managers who had a dreadful time between 2007 and spring of 2009. Over twelve months, MSCI ex-Japan is still down 26 per cent in US dollars. Thus, the 2009 rebound has only profited investors who entered the market this year and reduced the pain of others.

Jason McCay and Richard Evans who manage the Martin Currie Asia Fund, a hedge fund, are focusing on companies that concentrate on the domestic markets. They increased exposure to Chinese banks and have purchased residential Chinese developer Guangzhou R&F Properties. Bullish on coal, they have bought Bumi Resources in Indonesia and have also invested in the Indian property sector through Unitech.

They are concerned, however that the market surge has been caused by a surplus of liquidity. 'Valuations are no longer cheap and many companies are already pricing in a meaningful recovery in profits.'

Aberdeen Asia Pacific Fund contends that equities 'appear to have run ahead of earnings and economic fundamentals and a pullback would be healthy.' Longer-term, 'Asia's sounder economic fundamentals will enable it to bounce back more strongly than the West'. Top stocks include OCBC, Jardine Strategic Holding, Samsung Electronics, China Mobile and Singapore Telecommunications and Singapore Technologies.

Andrew Beal, fund manager of Henderson Asia Pacific Capital Growth, notes that aggressive government policies, loose monetary conditions and a steady improvement in economic activity have all helped to drive markets higher since March. Taking a long-term view, he says there is growing awareness among Asian governments over-reliance on exports to the West has become a structural weakness. It needs to be addressed by stimulating domestic consumption.

Top positions include China Construction Bank, LG Household & Heath Care, Sino Gold Mining, Taiwan Semiconductor, CSL, Sino Land and New World Development.