Asia-pacific stocks, with the exception of those in Japan, generally have done well in the past year, thanks to robust macro-economic conditions and attractive valuations. And although fund managers agree that Japan does not offer value comparative to its regional neighbours, they differ on where to emphasize portfolio holdings.

Among those who have been especially cautious is Chuk Wong, manager of Dynamic Far East Value Fund, and vice president at Toronto-based Goodman & Co. Investment Counsel. He’s concerned about the strong run in China and India, and has about 14% of the fund in cash. “They looked quite speculative. Other markets did well, but I wasn’t as concerned,” he says. “When you had the region driven by these two countries, and the two main stock markets were bubbly, it was prudent to have more cash.”

So-called “H” shares of Chinese firms listed in Hong Kong are trading at 30 times earnings. “By any measure, that’s expensive,” says Wong. Meanwhile, the Shanghai market (where so-called “B” shares trade) is up about 10% year-to-date in local terms, having recouped its February losses. “I don’t see the speculation in mainland China going away,” he says.

Hong Kong is also getting frothy, says Wong, who noted on a recent visit that initial public offerings were over-subscribed. “As a contrarian investor, when people are excited about the market, I try to stay away.”

India’s market has cooled, however, and is down around 10% year-to-date in local terms. “But the market is nervous about the macro-environment as well as the valuations,” says Wong.

In contrast, he argues, markets such as Thailand offer better value. “It is the cheapest in terms of price-to-earnings, nine times — compared with 17 times in India, 16.5 in China, 15.5 times in Hong Kong and 11 in South Korea.” Japan is also unappealing, he says, as its stocks trade at about 19 times earnings. “We’re still underweight on Japan, but not because the economy is not turning for the better. I find better value outside Japan.”

Wong is primarily a bottom-up investor who looks for well-managed companies with inexpensive stocks. “The cheap markets include South Korea, Taiwan, Thailand and Indonesia,” he says, noting that the portfolio weightings are 12%, 14%, 7% and 7%, respectively. Expensive markets include Japan, China and India at 8%, 16% and 5%, respectively. Hong Kong and Singapore are “fair value,” and each account for 7% of the fund.

One of his favourite holdings in the 53-name fund is Doosan Infracore Co. Ltd. of South Korea, the world’s fourth-largest maker of construction equipment.

“It’s the leading maker of exca-vators and machine tools in South Korea, and has the largest market share in excavators in China,” says Wong. The stock is trading at 14 times earnings, and has a dividend yield of 2% compared with its peer, Komatsu Industries Corp., which has a 17 P/E and 1% dividend yield. “If I had to choose one, it would be Doosan.” Bought about two years ago, the share price is 22,600 South Korean won. Wong believes it has about 40% upside over the next two years.

Another favourite is Siam Commercial Bank, one of Thailand’s leading commercial banks. Wong liked the bank and its focus on consumer retail banking, but did not take a position until after the market softened following the military coup. “Valuations got to a point where it was very attractive,” says Wong, adding that the bank trades at 10 times earnings and pays a 5% dividend yield. The stock is now 67 Thai baht, although Wong believes it has 20% upside over the next 12-18 months.



Equally cautious on Japan is Stuart Parks, co-manager of AIM Indo-Pacific Fund, and head of Asian equities at Invesco Perpetual, a unit of Amvescap PLC based in Britain.

“As long-term investors, the outlook within Asia is for out-performance of Asian ex-Japan stocks against Japanese stocks,” says Parks. “In particular, valuations in Japan are much more stretched. Corporate governance and emphasis on profitability is much more marked in a lot of Asia ex-Japan, than Japan itself. And the demographics are more favourable in Asia ex-Japan. Those are three fundamental reasons why we have consistently underweighted Japan, compared with the rest of Asia.”

The fund has a 35% Japanese weighting. There is also about 20% in Hong Kong and China (which are seen as one market), 10% Taiwan, 14% South Korea, 8% Singapore, 5% India, 5% Malaysia, and small holdings in Thailand and cash.

@page_break@Parks notes many Asian markets doubled over the three years ended in 2006. “By the end of the year, there were pockets of over-valuation in some Asian markets — not all of them and not all stocks by any means — and we thought valuations were starting to move up slightly. That was causing a bit of worry,” says Parks, who picks the Asia ex-Japan stocks, while Invesco Perpetual portfolio managers Paul Chesson and Tony Roberts select the Japanese names. “That’s why we were adopting a slightly more cautious stance. Within the Asia ex-Japan portfolio, that meant we toned down some of the growth components of the portfolio and became more defensive.”

As some Asian stocks got ahead of themselves, Parks exited from some Chinese life insurers that were trading at 40 times earnings, and shifted into Malaysia and South Korea. The former is expected to benefit from reforms being adopted by the government and improving corporate earnings. The latter is a cheap market, says Parks, as it trades at 10-11 times earnings, although economic growth is not especially strong. “It may not be as strong in economic terms as China, but it depends on what you want to pay up. We thought people were too pessimistic about South Korea,” he says, noting he has raised his exposure to 14% from 10% in the past few months.

Strategically, Parks is running a 100-name fund. Although eight of the top 10 holdings are Japanese — among them NTT DoCoMo Inc. and Nissan Motor Co. Ltd. — that is a little misleading. “The Japanese portfolio is very concentrated,” says Parks, noting the team owns 30 Japanese firms. “We find it difficult to find names. When we do, we’re happy to have high exposure in them.”

Although Parks expresses caution about some areas of the Chinese market — such as banks and life insurance firms — he does favour domestic consumer-oriented names. One favourite holding is Hong Kong-listed Ports Design Co., a luxury women’s apparel chain. Bought as an IPO about three years ago at HK$8, the stock is now HK$20. “It’s not cheap — about 23 times 2008 earnings. That said, it is growing at 25%-plus a year. The trade-off between valuation and growth is still attractive.”

Parks also favours South Korea’s Samsung Electronics Co. Ltd., a leading maker of flat-screen panels, cellular phones and so-called D-RAM semiconductors. The company’s stock has been flat in the past year because of an over-supply in the chip business and pricing pressure in the handset area. But Parks is hanging on, with the view that the share price could rise about 15% from 595,000 South Korean won in the next year.

“Why do we still think it is fine over the long term? Our answer is, through economies of scale it is profitable even at low pricing levels. Over time, competitors will go out of business or prices will start to push back up. Either way, that should increase profitability.”



For the past year, John Millar and Jason McCay, co-managers of TD Pacific Rim, have also favoured Asia ex-Japan, over Japan. “We can find a lot more interesting ideas in the rest of Asia,” says Millar, portfolio manager and Japanese equity specialist at Edinburgh-based Martin Currie Investment Management. (McCay is head of Asia and global emerging markets.) Almost 40% of the fund is in Japan, 13% Australia, 11.7% Hong Kong, 9.6% South Korea, 8.3% Taiwan, 6.3% China, and smaller holdings in India and Singapore.

Millar says Japan suffers in comparison with the rest of Asia for several reasons: valuations are higher; its P/E is above the mid-point of the historic range of 15-20 times earnings; its rate of earnings growth has been good but next year looks less promising. Finally, Japan’s economy is a mixed story: aggressive corporate re-structuring is continuing to unfold but it is offset by poor demographics in the form of an aging population, low birth rate and lack of immigration. “They will find it hard to grow,” says Millar.

In contrast, he looks more favourably on the broader region, focusing not only on its better demographics but also on the impact of the appreciation of China’s currency, the renminbi. “It has created a lot of liquidity,” says Miller, admitting that a significant flow of funds into China has raised concerns about valuations. But other currencies, such as the Malaysian ringit, have followed China. “The long-term argument for investing in Asia is growth in consumer spending. The other aspect is that as incomes rise, so will savings, some of which will go into equities. You can get benefits from both sides.”

From a strategic viewpoint, Millar is a bottom-up investor who seeks companies that are seeing positive change. This has led to a heavy weighting in consumer-related stocks. One example in the 90-name fund is China Mobile Ltd. It is among the fastest-growing cellphone companies in the world, growing at 17% a year. Acquired in late 2005, the Hong Kong-listed stock is now trading at HK$70. Millar has no stated target.

Another favourite is Taiwan Semiconductor Manufacturing Co. Ltd., which has successfully competed against Japanese semi-conductor makers. “It [has] been a long-term winner and now sits on a lot of cash,” says Millar, noting the firm has US$7 billion in excess capital. The stock already yields 4.4%, but Millar believes the company is under pressure to issue a special dividend. “Business is still good. But the risk-reward equation looks extremely attractive.” IE