Asia an investment choice for the bold

BRW, October 2008

If you think you’re struggling in the Australian stock market, just be grateful you’re not in China. The domestic market there is down 61% so far this year. And, across the supposedly vibrant stock markets of Asia, the situation is the same: Hong Kong down 34%, India 33%, Singapore 29%. Measured from last year’s highs, Asian stocks generally are off by 40%.

It wasn’t supposed to be this way. Asia didn’t cause sub-prime: in fact, by and large, its banks have had very little exposure to it. The highest economic growth rates are in Asia, reliance on exports to the rest of the world has arguably diminished (though perhaps not as much as people had hoped), and most nations are in the demographic sweet spot of a having a youthful and growing population, increasing in middle class wealth.

Yet global capital can behave in churlish ways, and as the problems in the US and Europe have worsened, more and more money has fled emerging markets to the supposed safe havens of the developed world.

But does all this create a great opportunity for Australian investors?  “Even the bears are saying we’re in deeply oversold territory now,” says Peter Sartori, founder of Treasury Asia Asset Management (TAAM), which runs an Asian equity fund from Sydney and Singapore. “Even they are saying we’re looking at a 20% bounce.

“The fundamentals of Asia are still pretty much intact: the problem is there has been a mass exodus of liquidity from the region, and mostly for non-Asian reasons.” Sartori’s colleague Tan Eng Teck says that after a flood of foreign money entered Asia from 2004 to last year, about half of it has fled in recent months, with $26 billion of net outflows recorded from six Asian countries alone to the end of July (and those six don’t include Hong Kong, where most foreign money comes through). “Generally, it’s leaving not because they don’t like Asia, but because they need the money at home,” says Sartori. “It’s unprecedented.”

Professionals are starting to take another look. “There is a bit of caution, and we could still see further downside, but we are approaching the levels where we are going to be more comfortable buying back in,” says Maria Abbonizio, investment director for Asia Pacific ex-Japan equities at Fidelity Investments.

After all, growth rates in Asia remain among the highest in the world. China’s economy is slowing, for sure – but to 10.1% in the second quarter of 2008, which compared to any developed market is an outrageous pace of growth. India has suffered in the credit crunch, and particularly has had to battle inflation as food and oil prices have risen, but still logged 9.1% growth in the 2007-8 financial year.

While it’s not automatic that this growth translates into stock market performance, it certainly can’t do any harm. It’s true that Asia will slow as its export partners flounder. “Whatever way you want to cut it we are still fairly leveraged to the global cycle,” says Abbonizio. But stock market values, having fallen so far, arguably now already reflect that, at least in places. “There are definite pockets of value emerging,” says Abbonizio. “China is quite cheap, at 10 times earnings.”

Indeed, China is the market that every portfolio manager spoken to for this article is highlighting. TAAM has been putting money into Chinese stocks including Beijing Enterprises, a Hong Kong-based holding company with a range of Chinese assets; China Railway Construction; and Huaneng Power. Fidelity has been focusing on domestic consumption plays, such as Belle International Holdings, a manufacturer of women’s footwear, geared towards growing discretionary wealth in China; and two energy stocks, the oil exploration company CNOOC and the coal miner China Shenhua. At AMP Capital Investors, head of Asian equities Karma Wilson has been overweight consumer staples, telecoms and utilities; her fund (see below) buys locally listed stocks such as the producer of the legendarily lethal Chinese liquor Maotai, as well as a pork processing company and a manufacturer of port machinery.

“China has had a number of devastating psychological blows, from the correction of the A-share market to the earthquake,” says Wilson. “But it’s looking brighter on the horizon. China has cut interest rates and lowered reserve requirements for smaller banks, indicating it is now less worried about inflation and more focused on sustaining economic growth.”

For those who do want to make investments in Asia, there are several ways of doing so.

The most obvious is to buy into an Asian equity managed fund. Researcher Morningstar tracks 32 Asia ex-Japan equity products sold here, although some of them are the same fund sold through different providers; some of the biggest by assets include the Platinum Asia Fund (by far the largest), Aberdeen Asian Opportunities Fund, BT Asian Share Fund, Challenger Asian Share Fund and the K2 Asian Absolute Return Fund. Others come from Fidelity, Advance, Colonial First State, Perennial, Invesco, Schroder, Perpetual and Treasury Asia Asset Management. An AMP product is believed to be on its way.

There are also some managed funds which invest only in one Asian nation, which picks the opportunity very specifically but also increases the risk of concentration. Aberdeen, Fidelity, Challenger and Premium have China funds, while India funds are sold by Fidelity and Fiducian.

Australia offers some listed investment companies, traded on the ASX like any other share, which invest in Asian markets. The AMP Capital China Growth Fund is one of the only ways Australians – or any non-Chinese – can get access to China’s A-share markets, which are the Shanghai and Shenzhen-traded stocks that locals buy (most people get exposure to China through shares listed in Hong Kong). There is also a LIC for India, called India Equities Fund, run by a group called Olympus Funds Management.

Another way of investing in Asian markets is to buy exchange-traded funds, which track the performance of a whole index but can be bought and sold like a share. (Unlike a LIC, these always reflect the value of the index they’re following; LICs can trade at a premium or discount to what they own.) A new range of ETFs called i-shares, backed by Barclays Global Investors, cover a number of Asian indices, including China, South Korea and Taiwan.

It’s also possible to buy Asian shares directly. Brokers can, for a fee, put you into all sorts of Asian markets (Hong Kong and Singapore are usually the easiest and cheapest to reach), and if your broker allows you to buy US shares – even some online brokers do this – then you can also buy American Depositary Receipts, which mirror the performance of particular Asian stocks. Numerous Chinese, Indian, Taiwanese and Korean companies, among others, do this. Remember you incur foreign exchange risk in any overseas transaction, though.