Fortis Investments targets cash-rich companies
Investment Outlook Series: Simon Godfrey, an investment specialist at Fortis, says extreme sell-offs have exaggerated the risk exposure of Asian companies to the global financial crisis.
This is part of an AsianInvestor series on the 2009 investment outlook of fund managers with Asian portfolios.
Simon Godfrey is a Hong Kong-based investment specialist for Asia ex-Japan equities at Fortis Investments. He has 13 years of investment experience. He is responsible for managing the interface between Fortis InvestmentsÆ Asian equity investment centres, customer relationship managers and external clients and prospects. He first joined Fortis Investments in Paris in 2005 and became the product specialist for European small- and large-cap equities as well as socially responsible investments. He was later seconded to Hong Kong in 2007.
The Hong Kong-based Asian Equity Investment Centre manages more than $4 billion in assets. The team of 10 portfolio managers and analysts is responsible for Asia Pacific ex-Japan portfolios and Greater China equity mandates, including Hong Kong equities. Globally, Fortis Investments manages around $241.9 billion.
What are the biggest opportunities that you see in the coming 12 months?
Godfrey: The financial crisis has been quite indiscriminate in its treatment of both the good and bad companies in our investment universe. Entire markets have been sold off û especially by international funds and asset allocators û in response to outflows, repatriation needs or the strict application of risk management policies. We believe this effect may have overplayed the real risk to Asian economies and corporate earnings, which is primarily cyclical.
Dependent on the earnings cycle bottoming out and leading indicators turning up again, there should be significant opportunities from investing in well-managed companies in the Asia-Pacific region with solid balance sheets. At first, we will continue to concentrate on cash-rich companies, for example in the telecoms sector and strong-brand consumer companies. As monetary easing and other stimulus starts to take effect, we will continue to concentrate on infrastructure and increase exposure to financials such as banks and property. Looking further out, there may be potential for consolidation in some industries, especially cyclicals, therefore picking the winners from the losers will be key.
From a country perspective, we will continue to favour the more domestically-oriented economies in the short-term such as India and some Southeast Asian countries that can benefit from an ongoing fall in inflation.
How has the global financial crisis affected the way you manage your portfolios?
A key difference compared to last year is that the country effect has been much less a determinant of overall returns. Of course, timing with regards to Taiwan, Korea or Indonesia, for example û all of which have out- or under-performed at certain periods due to country-specific factors û have added value. On a year-to-date basis, many of these countries and currencies have fallen by similar amounts, so there has been less benefit for a regional manager from making a strategic allocation by country.
We have taken much larger bets in terms of sectors, being completely absent from some industries where we believed there were most risks. Portfolio concentration has been all the more important in this environment, counter-intuitively perhaps, and we have increased the weighting in cash to levels greater than under normal circumstances.
So far, 2008 has been a very complex year for Asian equities due to the contrasting situations of the regionÆs two largest growth drivers, the US and China. It has been necessary to be reactive to the changing trends, without over-trading during the most volatile market phases. In fact, timing in terms of portfolio rotation has been key.
What is the biggest lesson you have learned from the US credit crisis?
Firstly, that the unthinkable can happen and as a consequence, risk control in any portfolio is of paramount importance. We should try to eliminate the possibility of having unintended risks in our portfolio, as their consequences can be amplified by extreme events.
Secondly, the importance of strong balance sheets at both a company and country level.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
At the middle of the year, when the Asian region was still facing a serious inflation crisis and we did not see in Asia the signs of downturn already evident in the US, Europe and Japan, we tilted the portfolios towards inflation beneficiaries: upstream commodity and energy producers, capital goods manufacturers with pricing power etcetera. However, as oil prices started to fall from July onwards, this tilt was gradually reversed out of cyclicals and into companies that would benefit from lower input costs. As the financial markets seized up in the third quarter, increasing the holdings in companies with sustainable profit streams and solid balance sheets was key. By the end of the period, we were strongly overweight telecoms, utilities and consumer staples.
In terms of countries, we have further increased the underweight positions in Korea and China, mainly because of the risks to certain sectors there, especially in materials and industrial stocks, due to the cyclical downturn.
What are your favoured markets in Asia?
As we are relative return investors we do invest across the board in countries and sectors and are able to find interesting opportunities in both. With cash at higher than normal levels in our portfolios, we would tend to be underweight in most countries right now. Our country weights are also a function of our bottom-up and sector strategy.
In this regard, our overweight positions in defensive stocks and sectors including strong cash generators leads us to have higher weightings in markets such as Hong Kong and Singapore, where these stocks are a greater part of the investment universe. India has also been moved to overweight, as the regionÆs largest oil importer it should benefit from lower inflation and monetary stimulus in the months ahead. That being said, we can find quality companies across the region, such as quality banks and telecoms in Korea, Philippines, Taiwan, Indonesia, Thailand.
What markets are you bearish over?
As our sector strategy is currently underweight with regards to cyclical sectors, we would tend to be underweight countries where the sensitivity to the global cycle is highest. Currently these include Korea and Taiwan and we are completely absent from the materials, energy and industrials sectors there. We remain cautious on China, where the risk to the external sector is currently being factored in and we donÆt yet have visibility about where the cycle will bottom out.
What are your market weightings within an Asia ex-Japan equities portfolio?
The absolute and relative weightings for a core Asian Equity portfolio are:
China: 21.11% absolute (-3.99% relative)
Hong Kong: 16.37% (+3.03%)
India: 10.76% (+0.99%)
Indonesia: 1.79% (-0.13%)
Korea: 14.97% (-3.50%)
Malaysia: 4.58% (-0.12%)
Pakistan: 0%
Philippines: 2.36% (+1.59%)
Singapore: 6.43% (-0.58%)
Sri Lanka: 0%
Taiwan: 11.37% (-5.06%)
Thailand: 3.46% (+1.26%)
Vietnam: 0%
Which sectors do you expect to outperform in the coming year?
We believe that in valuation terms, consumer staples û while currently expensive compared to other sectors û should continue to outperform. As stable cash generators, linked to the domestic economic situation, characterised by above-average growth in many Asian countries, we believe they will continue to attract investor interest. We prefer companies with strong domestic brands, as well as brands that are developing on a regional basis.
Another domestic area we like is infrastructure-related stocks especially in India where government policy remains supportive. We would invest selectively in transportation.
Though we believe that financials remain overvalued as a group and asset impairment will still need to work through, as the cyclical risk is high, we could see interest-rate sensitives as a group outperforming later in the period as monetary policy stimulates the property sector and increases margins.
Which sectors do you expect to underperform?
Materials remain vulnerable for the time being as profitability has peaked, commodity prices have shifted downwards and expansion plans are put on hold.
As a group, we would expect consumer discretionary and information technology to continue to underperform in the short-term, but are able to find interesting individual stock opportunities in both.
What are the main challenges that you expect to face in the coming 12 months?
With the G3 economies expected to remain weak for 2009, even if current recessionary conditions come to an end during that time, Asian governments must reduce their countriesÆ strong dependency on exports and promote policies that encourage domestic spending in infrastructure, property and consumption areas.
Our main challenge will be to anticipate when risk appetite will return for Asian equities as a whole and the sectors and stocks which will benefit in the initial phases of recovery. At the end of a bear market, it is likely that sector leadership will change. In addition, we need to be attentive to economic developments across the entire region û which is a large and incredibly complex one û to be able to spot opportunities from specific economic and political developments over the coming year.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
The main risks are both external and internal. External in that the deleveraging phenomenon we witnessed in October may return, if bearish conditions cause further fund redemptions. Many mutual fund investors will be counting their losses and while a lot of foreign capital has already flowed out of the regionÆs equity markets, more had flowed in over the last three years. Risk aversion remains high and until the economic situation in the US is stabilised, this support will not come back to the Asian markets.
Simon Godfrey is a Hong Kong-based investment specialist for Asia ex-Japan equities at Fortis Investments. He has 13 years of investment experience. He is responsible for managing the interface between Fortis InvestmentsÆ Asian equity investment centres, customer relationship managers and external clients and prospects. He first joined Fortis Investments in Paris in 2005 and became the product specialist for European small- and large-cap equities as well as socially responsible investments. He was later seconded to Hong Kong in 2007.
The Hong Kong-based Asian Equity Investment Centre manages more than $4 billion in assets. The team of 10 portfolio managers and analysts is responsible for Asia Pacific ex-Japan portfolios and Greater China equity mandates, including Hong Kong equities. Globally, Fortis Investments manages around $241.9 billion.
What are the biggest opportunities that you see in the coming 12 months?
Godfrey: The financial crisis has been quite indiscriminate in its treatment of both the good and bad companies in our investment universe. Entire markets have been sold off û especially by international funds and asset allocators û in response to outflows, repatriation needs or the strict application of risk management policies. We believe this effect may have overplayed the real risk to Asian economies and corporate earnings, which is primarily cyclical.
Dependent on the earnings cycle bottoming out and leading indicators turning up again, there should be significant opportunities from investing in well-managed companies in the Asia-Pacific region with solid balance sheets. At first, we will continue to concentrate on cash-rich companies, for example in the telecoms sector and strong-brand consumer companies. As monetary easing and other stimulus starts to take effect, we will continue to concentrate on infrastructure and increase exposure to financials such as banks and property. Looking further out, there may be potential for consolidation in some industries, especially cyclicals, therefore picking the winners from the losers will be key.
From a country perspective, we will continue to favour the more domestically-oriented economies in the short-term such as India and some Southeast Asian countries that can benefit from an ongoing fall in inflation.
How has the global financial crisis affected the way you manage your portfolios?
A key difference compared to last year is that the country effect has been much less a determinant of overall returns. Of course, timing with regards to Taiwan, Korea or Indonesia, for example û all of which have out- or under-performed at certain periods due to country-specific factors û have added value. On a year-to-date basis, many of these countries and currencies have fallen by similar amounts, so there has been less benefit for a regional manager from making a strategic allocation by country.
We have taken much larger bets in terms of sectors, being completely absent from some industries where we believed there were most risks. Portfolio concentration has been all the more important in this environment, counter-intuitively perhaps, and we have increased the weighting in cash to levels greater than under normal circumstances.
So far, 2008 has been a very complex year for Asian equities due to the contrasting situations of the regionÆs two largest growth drivers, the US and China. It has been necessary to be reactive to the changing trends, without over-trading during the most volatile market phases. In fact, timing in terms of portfolio rotation has been key.
What is the biggest lesson you have learned from the US credit crisis?
Firstly, that the unthinkable can happen and as a consequence, risk control in any portfolio is of paramount importance. We should try to eliminate the possibility of having unintended risks in our portfolio, as their consequences can be amplified by extreme events.
Secondly, the importance of strong balance sheets at both a company and country level.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
At the middle of the year, when the Asian region was still facing a serious inflation crisis and we did not see in Asia the signs of downturn already evident in the US, Europe and Japan, we tilted the portfolios towards inflation beneficiaries: upstream commodity and energy producers, capital goods manufacturers with pricing power etcetera. However, as oil prices started to fall from July onwards, this tilt was gradually reversed out of cyclicals and into companies that would benefit from lower input costs. As the financial markets seized up in the third quarter, increasing the holdings in companies with sustainable profit streams and solid balance sheets was key. By the end of the period, we were strongly overweight telecoms, utilities and consumer staples.
In terms of countries, we have further increased the underweight positions in Korea and China, mainly because of the risks to certain sectors there, especially in materials and industrial stocks, due to the cyclical downturn.
What are your favoured markets in Asia?
As we are relative return investors we do invest across the board in countries and sectors and are able to find interesting opportunities in both. With cash at higher than normal levels in our portfolios, we would tend to be underweight in most countries right now. Our country weights are also a function of our bottom-up and sector strategy.
In this regard, our overweight positions in defensive stocks and sectors including strong cash generators leads us to have higher weightings in markets such as Hong Kong and Singapore, where these stocks are a greater part of the investment universe. India has also been moved to overweight, as the regionÆs largest oil importer it should benefit from lower inflation and monetary stimulus in the months ahead. That being said, we can find quality companies across the region, such as quality banks and telecoms in Korea, Philippines, Taiwan, Indonesia, Thailand.
What markets are you bearish over?
As our sector strategy is currently underweight with regards to cyclical sectors, we would tend to be underweight countries where the sensitivity to the global cycle is highest. Currently these include Korea and Taiwan and we are completely absent from the materials, energy and industrials sectors there. We remain cautious on China, where the risk to the external sector is currently being factored in and we donÆt yet have visibility about where the cycle will bottom out.
What are your market weightings within an Asia ex-Japan equities portfolio?
The absolute and relative weightings for a core Asian Equity portfolio are:
China: 21.11% absolute (-3.99% relative)
Hong Kong: 16.37% (+3.03%)
India: 10.76% (+0.99%)
Indonesia: 1.79% (-0.13%)
Korea: 14.97% (-3.50%)
Malaysia: 4.58% (-0.12%)
Pakistan: 0%
Philippines: 2.36% (+1.59%)
Singapore: 6.43% (-0.58%)
Sri Lanka: 0%
Taiwan: 11.37% (-5.06%)
Thailand: 3.46% (+1.26%)
Vietnam: 0%
Which sectors do you expect to outperform in the coming year?
We believe that in valuation terms, consumer staples û while currently expensive compared to other sectors û should continue to outperform. As stable cash generators, linked to the domestic economic situation, characterised by above-average growth in many Asian countries, we believe they will continue to attract investor interest. We prefer companies with strong domestic brands, as well as brands that are developing on a regional basis.
Another domestic area we like is infrastructure-related stocks especially in India where government policy remains supportive. We would invest selectively in transportation.
Though we believe that financials remain overvalued as a group and asset impairment will still need to work through, as the cyclical risk is high, we could see interest-rate sensitives as a group outperforming later in the period as monetary policy stimulates the property sector and increases margins.
Which sectors do you expect to underperform?
Materials remain vulnerable for the time being as profitability has peaked, commodity prices have shifted downwards and expansion plans are put on hold.
As a group, we would expect consumer discretionary and information technology to continue to underperform in the short-term, but are able to find interesting individual stock opportunities in both.
What are the main challenges that you expect to face in the coming 12 months?
With the G3 economies expected to remain weak for 2009, even if current recessionary conditions come to an end during that time, Asian governments must reduce their countriesÆ strong dependency on exports and promote policies that encourage domestic spending in infrastructure, property and consumption areas.
Our main challenge will be to anticipate when risk appetite will return for Asian equities as a whole and the sectors and stocks which will benefit in the initial phases of recovery. At the end of a bear market, it is likely that sector leadership will change. In addition, we need to be attentive to economic developments across the entire region û which is a large and incredibly complex one û to be able to spot opportunities from specific economic and political developments over the coming year.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
The main risks are both external and internal. External in that the deleveraging phenomenon we witnessed in October may return, if bearish conditions cause further fund redemptions. Many mutual fund investors will be counting their losses and while a lot of foreign capital has already flowed out of the regionÆs equity markets, more had flowed in over the last three years. Risk aversion remains high and until the economic situation in the US is stabilised, this support will not come back to the Asian markets.
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