4th July 2011
Schroders head of product management for Asia excluding Japan, David MacKenzie warns investors not to overplay the consumption card and warns that some consumption related stocks may be overvalued.
He believes central banks elsewhere in Asia will remain hawkish about inflation and that opportunities lie with firms that have good earnings support and a quality bias.
Considering markets across the region, MacKenzie points out that China has faced a litany of problems from power shortages, severe weather conditions, higher fuel prices and rising inflation. But this has presented opportunities as money has flowed to developed markets.
He says: "In China valuations have begun to look more attractive and – although not extremely cheap nor without short-term risks – we are seeing more opportunities to enter this market."
He believes that Taiwan should benefit from various global corporate trends in particular a pick-up in IT spending but it remains uncertain how quickly, and he adds, that timing is everything when entering this sector.
He says: "Our bias is towards upstream companies (those that are near or at the initial stages of producing goods or services). Many downstream companies (those that assemble the final products) are currently being affected by higher input and labour costs, which provides the rationale for our Asia team's cautious stance on the sector.
"At present, market valuations look attractive and the economy isn't grappling with the same inflation concerns as many others in the region."
With Hong Kong pegged to the dollar, it has little flexibility on monetary policy, and it could suffer if US rates go up aggressively. He adds: "While Asian investors would do well to bear this in mind, we do not expect the US to tighten too aggressively. The US economy is muddling through and, as the recovery gathers pace, Hong Kong exporters should do well."
On Korea, where markets have surged, MacKenzie says he is reluctant to jump on the bandwagon. He adds: "There are exciting long-term trends taking place in Korea – from demographic to climate change – and, relative to other Asian economies, the country's equities trade at a valuation discount. Corporate earnings are rapidly growing as companies in Korea are becoming more competitive and have, since the financial crisis of 2008, taken a greater share of the global marketplace."
MacKenzie says that long term India is very interesting but it has a lot of hurdles to overcome short term. The market has recovered to some extent due to retreat in oil prices. However the manager wonders about whether the market will retain the confidence of investors who contributed to big foreign inflows in the second half of last year.
He says: "Valuation-wise, Indian equities are fair value, at best, but the sustainability of 8% GDP growth and uncertainty surrounding interest rates is hurting investor sentiment. In the second half of last year, the market attracted significant foreign inflows, and the questions is over whether these investors will stick with India over the course of what is likely to be a more difficult 2011."
More generally, the fund manager says that while investors should not abandon the consumption theme, it is in danger of being overplayed and some stocks are overvalued.