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Eastern philosophies

Three fund managers share their views on the outlook for the Asia excluding Japan sector

Positive on China

Alan Gibbs, fund manager, Waverton Asia Pacific

We are increasingly positive on the prospects for equities in China as we are finding excellent companies trading at reasonable valuations.

One such example is SouFun Holdings, which listed in the US last year. SouFun is the number one property search website in China with a market cap of $1.5bn. It generates its revenue from property services, listings and marketing with a presence in more than 100 cities.

The internet is made for China because of its excellent scalability and SouFun acts as the link between this and the property market, which, in spite of popular opinion, we consider to be very healthy.

At 15 times 2011 earnings and 73 per cent forecast earnings per share growth, SouFun looks very reasonable. Alongside Ivanhoe Mines (up 20 per cent) and 51job (up 10 per cent), SouFun was one of the best performers in the portfolio over the month.

Asian equity markets will probably remain volatile over the coming months as investors continue to digest the effects of severe La Niña weather patterns, Ben Bernanke’s printing press and the potential return of sovereign issues in Europe.

In the short to medium term, inflation will be the watchword but this will create opportunities to invest in the Asian structural development story at reasonable valuations.

Short-term volatility

Andrew Mattock and Caroline Maurer, co-managers, Henderson Horizon China

It is difficult to predict the onset of a recovery in stockmarkets as equity markets tend to run ahead of the release of economic data. However, we perceive periods of short-term volatility in markets as opportunities arise to buy into Chinese companies at attractive price levels.

We believe that in a rising interest rate and inflationary environment, banks, insurance companies and selective consumer names will benefit. We view any potential weakness on the back of rate hikes as a buying opportunity. Insurance companies could also see a boost in their investment returns and we are selectively positioned in Ping An Insurance and PICC.

Property transaction volume has held up well as demand from first-time buyers remains robust and investors still view property as a better source of returns than bank deposits. We are positioned in selective property companies with strong pre-sales records as earnings for the next one to two years are largely locked in. We do not expect rate rises to have much of an adverse impact on their balance sheets as large listed companies are able to obtain funding from equity and bond markets.

We are positive on major oil companies such as CNOOC and Petrochina, as well as cement and coal companies that are likely to do well once developed economies recover and demand returns. We continue to short the Hong Kong utility names we see as overvalued for their earning growth prospects and hold selective long and short consumer positions.

Alongside the fund’s holdings in Hong Kong/China, it has selective exposure to Taiwan, currently net exposure at 3 per cent. A benign inflationary environment, lower policy tightening risks and economic cooperation with China bodes well for the Taiwanese economy in 2011 and we have started to look for opportunities during market pullbacks to increase this exposure.

A moderating influence

Douglas Turnbull, fund manager, Neptune Greater China income

Anti-inflation is set to influence the agenda. The tightening cycle in China will accelerate to deal with inflationary pressures both internally, especially in terms of food prices, and externally, dealing with the wall of cheap money being created in the developed markets. However, in contrast to the continued innovative easing in the developed markets, this tightening ought to be broadly positive for the market as a moderating influence.

The 12th five-year plan will be finalised and implemented this year, with big investment consequences. The growth model will still rely on investment for continued urbanisation and industrialisation, the twin engines of wealth creation, but China’s 8 per cent growth target will become increasingly credible as it improves qualitatively . This will occur with a renewed focus on import substitution rather than export maximisation, rural development, industrial consolidation and wage increases, among other measures ultimately intended to boost domestic consumption.

Income will be another important theme and investors will increasingly look to benefit from the dividend stream already available in China, not to mention the dividend growth, capital growth and currency appreciation offered to equity income investors in this region.

Stocks to watch are Tsingtao Brewery Company, China Merchants Holdings, PetroChina and HSBC.


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