Matthews eyes emerging markets trade, mulls HK funds

Matthews Asia reckons the investor exodus from emerging markets has created an array of opportunities. At the same time, the asset manager is considering launching its first Asia-focused funds out of Hong Kong.

Investors have become more bearish on emerging market equities than they have been for 13 years, with the US Federal Reserve’s tapering comments often cited as the culprit.

Yet rather than focus on “what Ben Bernanke had for breakfast”, the San Francisco-based firm sees excellent companies now trading at cheap levels, notes Robert Horrocks, chief investment officer.

All of the $24.6 billion manager’s funds – 16 domiciled in the US and six Ucits products in Luxembourg – are managed by a 33-strong investment team in San Francisco.

And now the firm is considering rolling out similar strategies to be managed out of Hong Kong, in addition to the six Ucits products already offered to local investors. These would be the first funds to be managed outside of the US. (Its three-strong Hong Kong branch is used solely for sales and marketing, with James Campion, Asia head of business development, overseeing the office.)

“We wouldn’t rule out fund products [in Asia] more suitable to Asian investors,” San Francisco-based Horrocks tells AsianInvestor on a recent trip to Hong Kong. The firm has no concrete plans at the moment, he adds. “We want to be thoughtful here.”

Regarding the recent flight from EM assets, Horrocks acknowledges that India and Indonesia have been hit hard. Weakening currencies and high current account deficits coupled with the Fed’s tapering plans led to billions of investor outflows in India.

Rating agency Fitch cautions that private sector credit growth, widening fiscal deficits and ongoing inflation could lead to an even greater loss of investor confidence.

But Horrocks says: “We don’t start off with what the Fed is doing [when making investment decisions]. We see what the market reaction is and how that might open up opportunities. And given the depreciation of the rupee, we’re taking a harder look at India now for new ideas.”

While there are similarities between today’s exodus and the Asian crisis of 1997 – a strong US dollar, weak EM growth, account deficits – the situation was more severe then. In the lead-up to 1997, Asian banks and companies borrowed significant sums of money from the US, and as the US dollar rose, had trouble paying back their loans. It was a vicious cycle, Horrocks says, arguing that there isn’t the same level of indebtedness now with both countries holding enough in foreign exchange reserves.

Still, EM outflows continue, with the market correction in May particularly severe in China.

This has led regional institutional investors to mull investments in the US. Singaporean sovereign wealth fund Temasek Holdings is looking at potential office locations in the US, while Malaysian sovereign wealth fund Khazanah Nasional is setting up its first location in San Francisco.

The shift out of emerging markets and into developed economies is good news for those seeking exposure in Asia, Horrocks argues. “If people want to pay more for stocks that are more expensive and growing slower, that’s okay with me,” he says. “We’re looking in the other direction.”

Matthews Asia avoids materials sectors and commodities-related stocks. It also avoids tech hardware companies. “We want to own the company that owns the box, not the company that makes the box,” Horrocks says.

But it is eying the insurance sector, a growing industry that will continue to do so as Asians get wealthier. “Even in Hong Kong and Singapore, the insurance industries have a lot of room for growth,” Horrocks says. “It’s still undervalued when compared to the US."