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Asian equities: fund managers remain cautious

Asset managers tell us where they stand on Asian equities.

Asia has long been a point of contention for investors and continues to be so in the second half of 2018. On the one hand, investors see Asian equities as a proven growth story and a vital part of every portfolio. On the other hand, some believe the region's lack of available data makes it too risky to step into just yet.

Here, asset managers tell us how and where they’re positioned when it comes to Asian equities, including the funds they’re using to secure their bets.

This article originally appeared in the September issue of Citywire Switzerland.

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Asia has long been a point of contention for investors and continues to be so in the second half of 2018. On the one hand, investors see Asian equities as a proven growth story and a vital part of every portfolio. On the other hand, some believe the region's lack of available data makes it too risky to step into just yet.

Here, asset managers tell us how and where they’re positioned when it comes to Asian equities, including the funds they’re using to secure their bets.

This article originally appeared in the September issue of Citywire Switzerland.

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Please sign in or register to comment. It is free to register and only takes a minute or two.

Oliver Schlumpf

Vogt Asset Management

In our strategic asset allocation, around 10% of the equity exposure is to Asia ex-Japan. This has not changed recently because fundamental risk/return factors still speak in favour of Asian stocks. Tactically, which means in the shorter term, we have a neutral allocation to Asia, even though we are overweight equities on the whole.

This changes a little bit though if we take a closer look at our emerging market allocation. We prefer Asia as region within the emerging markets, but we haven’t simply implemented this view with a fund of emerging market stocks in Asia.

Besides the Fidelity Emerging Markets fund as a core investment, we also hold a position in the Lumen Vietnam fund. In our view, Vietnam is a very interesting investment opportunity, as it is still classified as a frontier market by MSCI but is expected to be ‘upgraded’ to an emerging market soon. This means that it should get a lot more attention from financial professionals in the near future. If you compare the inflows and outflows on the various stock exchanges in Southeast Asia, you’ll notice that more and more foreign investors are already investing in Vietnam.

Vietnam is in the process of transforming from a centrally planned economy to a market-driven one. The young and happily consumerist population is the great driving force behind its domestic demand. The travel industry is also experiencing a steady rise, as 16 million visitors are expected to head to the country this year. These two factors, in combination with high levels of foreign direct investment, will ensure that the strong growth rates of around 7% will persist for years to come. 

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Nicolas Pazos

Azure Wealth Switzerland

We are indeed allocating towards Asian equities, through a fund that targets small caps ex-Japan. This is part of our global strategic emerging markets exposure. On a tactical basis, we won’t change that for the foreseeable future.

However, in our eyes, China remains risky and volatile for several reasons:

1. The trade war with the US might escalate. We never know with the current POTUS.

2. Growth, although remaining at levels nowhere to be seen in Europe, continues to disappoint and is likely to head south.

3. Nearly three years of currency depreciation.

4. Concerning the first and third points, two major policy measures have been announced recently:

  • China is preparing to impose new tariffs in retaliation, after Trump raised tariffs from 10% to 25% on an additional $200 billion of Chinese exports. This will be the second retaliation of the trade war, after the first 25% tariffs on goods worth $50 billion. Talk about an escalation.
  • Massive intervention is expected from the central bank to support the renminbi versus the US dollar. The People’s Bank of China (PBoC) will also reimpose the 20% reserve requirement for FX forwards, having removed it back in September 2017. There’s a definite sense of déjà-vu here.

Although increased support measures are likely to prevent a harsh economic slowdown in the second half of the year, growth headwinds are expected to intensify. We think that the trade war and the growth downside risk will overshadow the corporate earnings and stock valuation.

Having said that, we are considering a tactical increase in our emerging markets bond exposure, specifically in China and Asia ex-Japan. Chinese bonds are likely to continue to perform well thanks to the support measures, and the currency will be stabilised by the PBoC’s interventions.

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Karl Safft

Safft Investment Partner

Within equities, we have shifted strongly to large caps to reflect the late phase of the equity cycle. We focus more on sectors than on regions – a philosophy that is still rare among fund managers.

Regarding Asia, we prefer managers with a strong regional presence, such as Harvest Global Investments. Co-operation with local specialists such as Edmond de Rothschild and Samsung Asset Management can be an interesting alternative to gain exposure, although we allocate to Asian equities only opportunistically. Our overweight lies in the rest of Asia.

We continue to see good value per unit of risk and a solid growth opportunity in Asia, with an average P/E ratio of 14, compared with 20 in the MSCI World index. Since our foundation in 2012, we have been continuously overweighting Asia, including Japan, which has served us well. Currently, we allocate 23% to the region and may increase by up to 30% within the next six to 12 months.

China continues to show robust GDP growth, with projected growth of 6.5% for 2018, combined with a healthy level of 2% inflation. In Japan, we expect inflation to evolve further.

We don’t expect the current punitive tariff escalation between the US and China to grow out of control. Trump is probably aware that this would cause too much harm to the global economy and that the US economy could suffer more than China’s, with a strengthening US dollar working against him.

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Patrick Spiess

International Capital Management

Modern asset management portfolios must be broadly diversified across asset classes and regions. A market like Asia cannot be ignored. A huge population, state-of-the-art innovative companies and global megatrends will strengthen the Asia region.

Especially in Asia, we hardly differentiate between developed and emerging markets. Instead, we consider the region as a whole. Major Asian countries – such as China, India, Indonesia and South Korea – currently have estimated average GDP growth of 6.5%, compared with an equivalent worldwide figure of just 3.9%. There are also plenty of small shining stars such as Vietnam.

The MSCI Asia ex-Japan index has outperformed the Euro Stoxx 50 over the past two and five years in US dollar terms. For sure, there is a lot of risk in the Asian market in general, which ends up as volatility, but we still believe that you will be compensated for it.

We see pressure from the US in the shape of the trade dispute and in the US Federal Reserve’s interest rates path. What’s more, a stronger US dollar is not conducive to investing in Asia. We see shifts from exports to domestic-focused economies. This makes the region less dependent on the growth of others. We have always been invested in Asia and we started to overweight Asia as a whole from the second half 2016 onwards following the drawdown.

Our top country picks are Vietnam, Thailand and South Korea. We have underweighted Indonesia and Pakistan. In terms of investment funds, we like diversified products such as the Schroder Asian Total Return fund. For specific overweights, we use ETFs.

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Mikhail Myakishev

Forum Finance Group

Asian equities play an important diversification role within our emerging market exposure, because the region has historically been a strong performance contributor, despite occasional periods of high volatility.

As with all portfolio components, emerging market exposure – and particularly Asia – is more of a risk management task than a simple capital allocation.

We use actively managed funds for our strategic emerging market allocation, whereas ETFs are reserved for tactical opportunities. The funds we select have to demonstrate a proven track record of picking companies with strong balance sheets and good corporate governance. Our Asia-centric investments are especially tilted towards a manager with a ‘forensic accounting’ capacity to mitigate additional risks.

Since the beginning of the year, we have steadily increased our pan-Asian exposure on the back of attractive valuations. Emerging markets in general have been under pressure this year, not just the Asian region. Some of the volatility is related to idiosyncratic matters, such as politics and fears of escalating sanctions, while other concerns are applicable for all markets, including developed ones: tightening of financial conditions and resulting US dollar strength, increasing trade tensions, and rising energy prices.

Most of these matters are nothing new for emerging markets and tend to have a greater impact on economies that failed to take precautionary measures during the good times – by diversifying their energy consumption or securing other energy sources, for example, or reducing and diversifying non-local currency debt issuance.

However, emerging markets are now in a much better position than during some of the past reference periods used by investors. In most cases, their currencies seem to be undervalued.

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