Asia keeps pace, to China’s beat

“Inflation is benign, on the back of softening commodity prices and the sharp drop in oil prices,” says Ronald Chan, senior managing director of Asian equities with Manulife Asset Management (Hong Kong) Ltd. “Combined with the recovery in the U.S., things are set up quite well for the Asian region as we go into 2015.”

With little inflation, Chan says, interest rates may fall further in 2015 in Asia, a move in the opposite direction to that of U.S. rates, which probably have bottomed.

Growth in Asia’s combined gross domestic product (GDP) is being driven by a healthy combination of external demand and rising domestic consumption as the expanding middle class demands goods and conveniences familiar to the developed world. Any downside risks stem from the potential for tightening in global financial markets and weak GDP growth in advanced economies such as Japan and Europe. In addition, the weakening yen is giving Japan a competitive edge relative to other Asian countries in export-related manufacturing industries such as cars.

“Asia has a lot of export industries, and a number of countries are reliant on external trade,” says Eng Hock Ong, managing director, AGF Asset Management Asia Ltd., and portfolio manager of AGF Asian Growth Class Fund, sponsored by AGF Investments Inc. of Toronto. “The global recovery has been uneven, with growth halted in the eurozone and Japan, but the pace appears to be picking up in the important U.S. market. Inter-regional trade continues to grow.”

Infrastructure development is a common theme in many Asian countries as governments invest in roads, ports, railways, power generation and other projects.

“Looking into 2015, we are still optimistic about emerging Asia, although with some caution,” says Chuk Wong, vice president of 1832 Asset Management LP and lead portfolio manager of Dynamic Far East Value Fund, sponsored by Bank of Nova Scotia. “The region is still somewhat underappreciated as investors focus on opportunities in the U.S. [Asia] could surprise on the upside in the years to come, as it is one of the fastest-growing in the world.”

Mark Lin, vice president of international equities with CIBC Asset Management Inc. in Montreal and portfolio manager of CIBC Asia-Pacific Fund, warns that any global financial instability would be negative for Asia, as investors tend to depart emerging markets in volatile times and head for the perceived safe haven of developed markets, such as the U.S.

“It happened a year and a half ago with the ‘taper talk’,” Lin says, “when expectations rose that the U.S. would end quantitative easing and raise interest rates, and money fled emerging markets.”

Wong says a profitable way to invest in emerging countries is through ownership of shares of financial services institutions that tend to grow along with the economy. Among the Dynamic fund’s holdings are Bank Negara Indonesia and Bank Rakyat Indonesia. In India, the fund invests in Union Bank of India, a commercial bank; and LIC Housing Finance Ltd.

Wong sees advantages in moving early into frontier markets such as Pakistan and Vietnam. He likes Pakistan-based commercial bank MCB Bank Ltd. and, in Vietnam, the Dynamic fund holds Vietnam Dairy Products JSC.

“In frontier markets, you can uncover diamonds in the rough,” Wong says. “There is no shortage of well-run companies that many people ignore due to headline issues.”

Below is a look at a handful of Asian markets. (For China, see page B14.)

– India. The largest emerging economy after China, India has been energized by the election of a new pro-business prime minister, Narendra Modi, who won a decisive majority last May. If Modi achieves his goal of accelerating annual GDP growth beyond the current level of about 5% to as much as 8% within the next three or four years, India’s GDP growth may outstrip that of China.

“We like domestic companies growing at high rates, and are less interested in multinationals that are tied to the global market and its slower pace of growth,” says David Kunselman, senior portfolio manager and chief compliance officer with Excel Funds Management Inc. of Mississauga, Ont. “Many Indians are now buying their first car, motorcycle or house, and huge opportunities are being found in the financial [services] sector as borrowing becomes more popular.”

The top 10 holdings in Excel India Fund include several financial services companies, such as HDFC Bank Ltd., Housing Development Finance Corp. Ltd., ICICI Bank Ltd. and Yes Bank Ltd.

“India is 10 to 15 years behind China in terms of economic development, and is on a similar upward trajectory,” Chan adds.

– south korea. South Korea’s exports generally are being hurt by the strength in the country’s currency relative to the yen. Carmakers such as KIA Motors Corp. and Hyundai Motor Co. are vulnerable to competition from Japanese companies. In addition, Hock Ong says, corporate electronics giant Samsung Group is being squeezed in the mobile devices market by the popularity of Apple Inc. products at the high end and Chinese products at the low end. In the technology sector, he prefers SK Hynix Inc., the world’s second-largest memory-chip maker and the world’s sixth-largest semiconductor company.

Wong is optimistic about Medytox Inc., a leading producer of Botox, which is expanding into international markets for cosmetic and therapeutic products.

– Indonesia. Indonesia is a big country with a large population – about 250 million – and an average age of 28. Growth is moving from commodities-based exports to domestic consumption. Lin expects the current GDP of roughly US$3,000 per person could double in the next few years. Like Wong, he favours banks, and the CIBC fund holds shares in Bank Rakyat and Bank Negara.

– Taiwan. As a major exporter of parts for the technology sector, Taiwan has links to global producers of smartphones, tablets and personal computers. Hock Ong and Lin both like Foxconn Technology Group, the holding company for Hon Hai Precision Industry Co. Ltd., a multinational electronics manufacturer.

Eileen Dibb, portfolio manager with Pyramis Global Advisors in Smithfield, R.I., a division of Boston-based FMR LLC (a.k.a. Fidelity Investments) likes Techtronic Industries Co. Ltd., a manufacturer of power tools for household maintenance that exports worldwide.

– Malaysia. Most portfolio managers are underweighted in resources-oriented Malaysia, a net exporter of oil that will be hurt by lower prices. Hock Ong invests in Genting Plantations Berhad, a producer of palm oil with interests in property development and biotechnology.

– Hong Kong. Although the news has been dominated by pro-democracy demonstrations, the long-term outlook for Hong Kong remains optimistic. Lin’s CIBC fund invests in Hutchison Whampoa Ltd., an international firm with holdings encompassing ports, telecommunication operations, retail and property development.

Dibb likes AIA Group Ltd., an insurance firm that sells door to door and is expanding across Asia.

– Thailand. After some political upheaval, this country is settling down under the military-led regime that came to power last May. GDP growth depends upon the success of stimulus measures and whether tourism will revive now that the political situation is stable, says Hock Ong. The AGF fund invests in Kasikornbank Public Co. Ltd., the country’s largest bank; and Siam Cement Public Co. Ltd.

Wong likes Siam Commercial Bank and Delta Electronics Inc., a manufacturer of electronic power bars and cellphone chargers.

© 2015 Investment Executive. All rights reserved.