JFÆs only overweight in Asia is China
Investment Outlook Series: Victor Lee, a regional investment manager at JF Asset Management, says confidence in China stems from the government's maximum effort to support growth and employment.
This is part of an AsianInvestor series on the 2009 investment outlook of fund managers with Asian portfolios.
Victor Lee is a Hong Kong-based regional investment manager and technology specialist with the Pacific Regional Group of JF Asset in Hong Kong. He joined the fund house as a research analyst in the global portfolios group in 1997 and was responsible for North America research. He was then transferred to Pacific regional group as a regional investment manager in 1999, and since then, he has specialised in Asia-Pacific equities, including Japan. He also manages absolute return funds and technology funds.
JF Asset ManagementÆs Pacific regional group manages around $35 billion. J.P. Morgan Asset Management (the new business brand of JF Asset Management) manages around $1.2 trillion worldwide, including $90 billion in Asia.
What are the biggest opportunities that you see in the coming 12 months?
Lee: We see the biggest opportunity in China plays over the next 12 months and thus we are overweight China in our Asia-Pacific regional equity portfolios. We expect macro and corporate earnings news in China to get worse in the fourth quarter as the massive fiscal stimulus will take time to feed into the economy. However, we expect China to have the ability to maintain around 8% economic growth in 2009 as a whole. We also expect to see the Chinese authorities announce more measures, both fiscal and monetary, to help the economy avoid a hard landing. For example, there is some scope to introduce a cut in personal income tax next year, which should help to stabilise the economy together with the big increase in public sector infrastructure capital expenditure.
How has the global financial crisis affected the way you manage your portfolios?
We have naturally been more cautious, more defensively positioned and have been keeping cash at a relatively high level in our Asia portfolios this year, given the seriousness of the financial crisis and investors' extreme level of risk aversion. Companies which rely on a high degree of leverage, or which have large US dollar refinancing needs are to be avoided, as also are those who may have bitten off more than they can chew in terms of extra-Asian M&A deals during the good times.
What is the biggest lesson you have learned from the US credit crisis?
Any credit crisis begins with too much debt in the first place. It happened during the Asian crisis here when Asian companies accumulated too much debt during the boom and it now happens to the US and some other Western countries. Perhaps the greatest lesson to learn from this is how in a world of near-perfect capital mobility, spillovers and linkages from financial markets to the real economy have greatly multiplied and increased, often in ways that cannot be easily articulated. One must be ever-vigilant with regard to unusual financial trends or developments outside Asia, as at the moment the region unfortunately does not possess the necessary strengths or depth to enable the economy and markets to decouple from external events.
What are your favoured markets in Asia?
We have been overweight China for a long time, as we believed that the Chinese government had the intention and the ability to stimulate domestic consumption. The hoped for stimulus measures have surpassed everyone's expectations, though it is also the case that the post-Olympic economic data for China had begun to deteriorate at a surprisingly rapid rate, first heralded by the fall in the September PMI (purchasing managers index) and later confirmed by the sharp deceleration in the industrial production numbers for October. But the key issue for us is not the exact size of the package or the precise details of its composition, but what matters most is that Beijing has shown it is making a maximum effort to support growth and employment.
What markets are you bearish over?
We are currently structurally underweight Taiwan (due to its large, export-oriented technology sector which is being hurt by the declining demand from the US and Europe, and by its lacklustre domestic economy which looks to be heading for a contraction in 2009), Malaysia (after the sharp correction in commodities that may still have further to run and a market dominated by higher-beta small caps that would not be the first to participate in a market recovery), Thailand (ongoing political uncertainty and a lack of direction with regard to economic policy) and the Philippines (a small illiquid market whose inward remittance receipts from overseas Filipino contract workers will not be immune to the negative impact of the global recession).
What are your market weightings within an Asia ex-Japan equities portfolio?
China - Overweight
Hong Kong - Neutral
India - Neutral
Indonesia - Neutral
Korea - Neutral
Malaysia - Underweight
Pakistan û N/A
Philippines - Underweight
Singapore - Neutral
Sri Lanka - N/A
Taiwan - Underweight
Thailand - Underweight
Vietnam - N/A
Which sectors do you expect to outperform in the coming year?
We like big caps and telecom stocks, for their more defensive nature. In the environment of shrinking liquidity in the market, investors will prefer to own blue-chip companies over the down cycle. It is also easier for blue-chip companies to get bank financing during the credit tightening environment.
Which sectors do you expect to underperform?
We are very underweight Australian banks (credit problems there have yet to be solved with the highly leveraged commercial banks and excessive system loan-to-deposit ratio), have reduced cyclical stocks throughout our portfolios, and have also stayed away from small- and mid-caps in Asean, as the liquidity in this space has naturally suffered the most.
What are the main challenges that you expect to face in the coming 12 months?
Fear of a deep and prolonged recession will continue to dominate world markets well into 2009. Economic figures will weaken further and we expect to see more downgrades in corporate earnings estimates - the current rate of negative revisions is the highest on record. Commercial real estate and credit card debt will be the next big negative stories. The car industry in the US will be one of the next US President's first headaches. More bad news will roll out over the next three quarters, at least. Concerted global action on the credit crunch and financial system will take some months to take effect. Deleveraging will continue to take place, particularly to some investment banks that are still over 20 to 30 times geared. Market volatility will remain very high.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
Consumption trends in the US and Europe is weakening dramatically and this is ringing more alarm bells amongst Asian exporters. Hence, we are underweight Asian exporters and related sectors. Investors will continue to be risk averse given the fear of recession and deflation. Thus, we will continue to keep a relatively high level of cash in our portfolios for now, even though valuations have fallen to historically attractive levels after discounting the likely earnings downgrades for next year.
Victor Lee is a Hong Kong-based regional investment manager and technology specialist with the Pacific Regional Group of JF Asset in Hong Kong. He joined the fund house as a research analyst in the global portfolios group in 1997 and was responsible for North America research. He was then transferred to Pacific regional group as a regional investment manager in 1999, and since then, he has specialised in Asia-Pacific equities, including Japan. He also manages absolute return funds and technology funds.
JF Asset ManagementÆs Pacific regional group manages around $35 billion. J.P. Morgan Asset Management (the new business brand of JF Asset Management) manages around $1.2 trillion worldwide, including $90 billion in Asia.
What are the biggest opportunities that you see in the coming 12 months?
Lee: We see the biggest opportunity in China plays over the next 12 months and thus we are overweight China in our Asia-Pacific regional equity portfolios. We expect macro and corporate earnings news in China to get worse in the fourth quarter as the massive fiscal stimulus will take time to feed into the economy. However, we expect China to have the ability to maintain around 8% economic growth in 2009 as a whole. We also expect to see the Chinese authorities announce more measures, both fiscal and monetary, to help the economy avoid a hard landing. For example, there is some scope to introduce a cut in personal income tax next year, which should help to stabilise the economy together with the big increase in public sector infrastructure capital expenditure.
How has the global financial crisis affected the way you manage your portfolios?
We have naturally been more cautious, more defensively positioned and have been keeping cash at a relatively high level in our Asia portfolios this year, given the seriousness of the financial crisis and investors' extreme level of risk aversion. Companies which rely on a high degree of leverage, or which have large US dollar refinancing needs are to be avoided, as also are those who may have bitten off more than they can chew in terms of extra-Asian M&A deals during the good times.
What is the biggest lesson you have learned from the US credit crisis?
Any credit crisis begins with too much debt in the first place. It happened during the Asian crisis here when Asian companies accumulated too much debt during the boom and it now happens to the US and some other Western countries. Perhaps the greatest lesson to learn from this is how in a world of near-perfect capital mobility, spillovers and linkages from financial markets to the real economy have greatly multiplied and increased, often in ways that cannot be easily articulated. One must be ever-vigilant with regard to unusual financial trends or developments outside Asia, as at the moment the region unfortunately does not possess the necessary strengths or depth to enable the economy and markets to decouple from external events.
What are your favoured markets in Asia?
We have been overweight China for a long time, as we believed that the Chinese government had the intention and the ability to stimulate domestic consumption. The hoped for stimulus measures have surpassed everyone's expectations, though it is also the case that the post-Olympic economic data for China had begun to deteriorate at a surprisingly rapid rate, first heralded by the fall in the September PMI (purchasing managers index) and later confirmed by the sharp deceleration in the industrial production numbers for October. But the key issue for us is not the exact size of the package or the precise details of its composition, but what matters most is that Beijing has shown it is making a maximum effort to support growth and employment.
What markets are you bearish over?
We are currently structurally underweight Taiwan (due to its large, export-oriented technology sector which is being hurt by the declining demand from the US and Europe, and by its lacklustre domestic economy which looks to be heading for a contraction in 2009), Malaysia (after the sharp correction in commodities that may still have further to run and a market dominated by higher-beta small caps that would not be the first to participate in a market recovery), Thailand (ongoing political uncertainty and a lack of direction with regard to economic policy) and the Philippines (a small illiquid market whose inward remittance receipts from overseas Filipino contract workers will not be immune to the negative impact of the global recession).
What are your market weightings within an Asia ex-Japan equities portfolio?
China - Overweight
Hong Kong - Neutral
India - Neutral
Indonesia - Neutral
Korea - Neutral
Malaysia - Underweight
Pakistan û N/A
Philippines - Underweight
Singapore - Neutral
Sri Lanka - N/A
Taiwan - Underweight
Thailand - Underweight
Vietnam - N/A
Which sectors do you expect to outperform in the coming year?
We like big caps and telecom stocks, for their more defensive nature. In the environment of shrinking liquidity in the market, investors will prefer to own blue-chip companies over the down cycle. It is also easier for blue-chip companies to get bank financing during the credit tightening environment.
Which sectors do you expect to underperform?
We are very underweight Australian banks (credit problems there have yet to be solved with the highly leveraged commercial banks and excessive system loan-to-deposit ratio), have reduced cyclical stocks throughout our portfolios, and have also stayed away from small- and mid-caps in Asean, as the liquidity in this space has naturally suffered the most.
What are the main challenges that you expect to face in the coming 12 months?
Fear of a deep and prolonged recession will continue to dominate world markets well into 2009. Economic figures will weaken further and we expect to see more downgrades in corporate earnings estimates - the current rate of negative revisions is the highest on record. Commercial real estate and credit card debt will be the next big negative stories. The car industry in the US will be one of the next US President's first headaches. More bad news will roll out over the next three quarters, at least. Concerted global action on the credit crunch and financial system will take some months to take effect. Deleveraging will continue to take place, particularly to some investment banks that are still over 20 to 30 times geared. Market volatility will remain very high.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
Consumption trends in the US and Europe is weakening dramatically and this is ringing more alarm bells amongst Asian exporters. Hence, we are underweight Asian exporters and related sectors. Investors will continue to be risk averse given the fear of recession and deflation. Thus, we will continue to keep a relatively high level of cash in our portfolios for now, even though valuations have fallen to historically attractive levels after discounting the likely earnings downgrades for next year.
¬ Haymarket Media Limited. All rights reserved.