Asia-pacific markets have shown some resilience in the past month or so, as concerns about the global economic slowdown subside. Some fund managers are confident the outlook is improving, with growth prospects for the region better than those in the rest of the world.

“We are cautiously optimistically about the general outlook,” says Andrew Foster, lead manager of BMO Guardian Asian Growth & Income Fund, offered by BMO Guardian Funds, and acting chief investment officer with San Francisco-based Matthews International Capital Management LLC. “We are seeing some signs of relatively resilient growth, although it is more of a domestic origin. Some of the fastest-growing export sectors and commodity sectors have pulled back.”

Moreover, if the U.S. economy grows weaker, it will be difficult for its trading partners to show relative strength. “If the U.S. is a black hole,” Foster says, “it could drag the rest of the world down with it.”

On a positive note, however, Foster believes that stock valuations as of mid-March were at the lowest levels ever seen, even lower than in the 1998 Asian crisis. “And dividends are at the highest levels we’ve seen,” says Foster. The dividend yield of the fund’s equity component is around 6.5%.

Foster believes that a robust stock market turnaround is dependent on merger and acquisition activity or share buybacks. “If the market for control begins to assert itself,” says Foster, referring to cash-rich competitors chasing weaker players, thus driving up stock prices, “you could be more confident of values stabilizing. The problem is that until the banks facilitate these mergers, the market for control will be hard to produce.”

From a strategic viewpoint, Foster has about 63% of the BMO fund’s assets under management in stocks, 35% in convertible bonds and 2% in cash. On a geographical basis, about 30% of the fund’s AUM is in Hong Kong and China (which are regarded as one market), 11% in Singapore, 8.5% in Taiwan and 5% in Japan; the fund has smaller holdings in Singapore, Thailand and Australia.

Referring to the bond component of the BMO fund, which is designed to reduce volatility, Foster says: “Our goal is to capture some of the upside performance, but not as much as a pure equity fund.”

The bond weighting was about 17% at the start of 2008 but doubled toward the end of the year, as distressed investors sold bonds at very attractive prices. The bonds have an embedded equity option, but that option value collapsed in last fall’s sell-off, resulting in yields of around 12%-13%.

“In that event, we found opportunity,” says Foster. Some of the fund’s top holdings include bonds issued by Hong Kong Land Holdings Ltd., China Petroleum & Chemical Ltd., Yue Yuen Industrial (Holding) Ltd. and Reliance Communications Ltd.

On the equities side, one of the largest holdings in the 78-name fund is Taiwan Semiconductor Manufacturing Co., the world’s largest independent microchip manufacturer. “Historically, the cyclical nature of the semiconduc-tor industry has put us off,” Foster says. “But we noticed about two and a half years ago that the industry was stabilizing, there were consolidation pressures and less aggressive capital expenditures.”

Taiwan Semi-con-ductor’s free cash flow had also grown significantly, and its dividend had been rising. “The dividend is very secure,” says Foster; the yield is about 6.25%. The company trades as an American depositary receipt listed on the New York Stock Exchange. An ADR was recently priced at US$9.75, vs US$11 two years ago, when the investment was acquired.



A market rebound depends on the stabilization of the macro-economic picture, argues Tim Leung, lead manager of Investors Pan Asian Growth Fund and head of Asian equities at Hong Kong-based I.G. Investment Management (H.K.) Ltd. And things are looking up.

“The economy in Asia-Pacific has some positive attributes that make us believe that the region will be a better asset class on a global basis,” says Leung. “The ability of the Chinese economy to grow relatively robustly, even in the face of the much weaker global outlook, is an important driver. The increased trade integration between Asian countries and China and China’s sustainable growth will also help surrounding countries post better economic growth in the coming years.”

Because Asia as a whole has a better balance sheet than many developed economies, he argues, the region will continue to industrialize and have a more sustainable growth trajectory.

@page_break@“We are relatively optimistic about the growth outlook for the region,” says Leung, who works with co-manager and portfolio manager Erwin Hidalgo. Noting that the market correction has resulted in valuations not seen for many years, Leung adds: “There is an argument that we are looking at very deeply discounted companies.”

Asia has been vulnerable, however, because exports have dropped by about 30%-40% on an annualized basis. But many countries have eased the pressure by cutting interest rates aggressively and introducing fiscal measures, Leung says. China, for example, has introduced a US$600-billion package designed to stimulate growth, while Japan is spending about US$200 billion for similar reasons.

“In rough figures, this represents about 2%-3% of GDP of the region,” says Leung. “Government action is providing support of their economies, and it should help restore confidence.”

Leung and Hidalgo are growth managers who use a blend of stock-picking and top-down analysis to control country risk. “Asia is a very diverse region and each country has its own characteristics in terms of economic strength and monetary and fiscal policy,” says Leung. “Within each country, we aim to pick the best opportunities.”

The fund deviates only slightly from the benchmark MSCI Asia-Pacific all-country index, so about 50% of the fund’s AUM is invested in Japan (vs 52% in the index), followed by 13% in Hong Kong and China, 10% in Australia, 6% in South Korea, 4% in Singapore and smaller amounts in markets such as Thailand.

“We are seeing a lot of value in Japan. Valuations are at a 25-year low,” says Leung. “It has not been easy for us for the past two years. But from what we’ve seen in the market, and with the government taking more aggressive action in terms of stimulating the economy, we think the market has better potential going forward.”

Sony Corp. is a top Japanese holding in the 64-name Investors fund. A household name in the consumer electronics field, Sony has been under pressure because of poor profitability and stiff competition from other Asian players.

“It’s a potential recovery play,” says Leung. Sony’s chairman, Sir Howard Stringer, has brought in new management and is focusing the company on sales and profitability instead of pure engineering. “Sony is also engaging in an ‘asset-light’ strategy: outsourcing, and sharing spending with other manufacturers in capital-intensive projects. We should be able to see better results from now on.”

Sony’s stock is trading at 60% of book value and at 3.5 times earnings before interest, taxes, depreciation and amortization. A core holding, the stock was recently trading at 2,420 yen a share, vs 4,200 yen in March 2008. Leung has no stated target.

Another favourite is Industrial & Commercial Bank of China Ltd. The largest bank in the world, in terms of market capitalization, the bank has US$1.4 trillion in assets.

“It just reported 36% year-on-year growth in net profit for calendar 2008,” says Leung. “Unlike the rest of the world, the Chinese banking system is enjoying relatively robust growth and a healthy operating environment.

“Compared with a lot of Western banks, this institution actually has a very conservative balance sheet,” he says. It lends out only 54¢ for every $1 on deposit. “There is a lot of government stimulus going into the economy. Loan growth will probably continue to do quite well.”

A long-term holding listed on the Hong Kong exchange, the bank’s stock recently traded at HK$9.70 a share, vs HK$20 a year ago.



Because Mark Lin, manager of CIBC Asia Pacific Fund and vice president of Montreal-based CIBC Global Asset Management Inc., is a bottom-up stock-picker, he is reluctant to make any macro or market calls.

“How many people foresaw that the credit market actually came to a halt [last fall],” he says, “and triggered a very severe scenario, which was far worse than most people expected?”

Still, Lin is confident about the Asia-Pacific region because its growth will outpace the rest of the world. “Yes, 10% GDP growth in China is gone. That’s history,” he says. “But even if China grows at 5%-6%, that’s much faster than the rest of the world.”

Many Chinese companies are well capitalized, he adds, because they went public in the peak market years. As well, many firms are turning their focus to the domestic Chinese market, which offers better growth prospects than offshore.

From a geographical standpoint, Lin has about 32.4% of the fund’s AUM in Japan, 19.5% in Australia, 16% in Hong Kong, 7.6% in China and smaller weightings in Singapore and South Korea; 5% of AUM is in cash.

A GARP investor who favours non-cyclical firms whose growth is predictable and that benefit from long-term or demographic trends, Lin has allocated 34% of the fund’s AUM to the health-care sector. That’s followed by 12% to consumer staples, 12% to consumer discretionary, 11.5% to financial services, 12% to technology and smaller weightings to areas such as telecommunications.

One of the largest holdings in the 40-name CIBC fund is Mindray Medical International Ltd. The firm, which makes patient-monitoring equipment and blood analyzers, has expanded rapidly into foreign markets, although 49% of total sales are domestic.

“It’s taking market share away from Western players such as GE and Siemens. And the Chinese health-care market is projected to grow in the high single digits,” says Lin, adding that Mindray is the dominant player domestically. “Expanding overseas dilutes its growth rate a bit. But that’s fine. We’re long-term investors. We like to see it grow well in China, which has the biggest potential.”

Mindray’s ADR is listed on the NYSE and recently traded at US$20.22, vs about US$25 when it was acquired in 2007. Lin has no stated target.

Another large holding is Woolworths Ltd., the top supermarket chain in Australia. “It’s the Loblaws of Australia,” says Lin, noting that, like its Canadian peer, the firm is benefiting from a highly concentrated grocery market. “Growth is decent, around 5% on the top line. The bottom line is close to 10%.”

The stock recently traded at AU$25.75 a share, vs AU$27 a share when it was acquired in 2007. IE