Although Asian stock markets have fallen harder in the past year than those in North America, the Asia region is rife with attractive opportunities, says Eng Hock Ong, managing director of Singapore-based AGF Asset Management Asia Ltd. and manager of AGF Asian Growth Class Fund.

“Asian markets have come down more than developed markets, but it is largely due to the fear factor,” says Ong, who has managed the fund since January 2005. “Foreign investors tend to be more nervous when their holdings are far away. There has also been a lot of profit-taking this year after the huge profits that were made last year.”

AGF Asian Growth Class lost 35.8% in the year ended Sept. 30, vs a loss of 34.8% for its benchmark, the MSCI Far East free (ex-Japan) total return index. On average, Asian price/earnings ratios have fallen to 7.2 times, compared with an historical average of 12 times and last year’s peak of 16 times.

But, Ong says, Asian companies are still in good shape; corporate leverage has come down and balance sheets have been strengthened. Also, most Asian countries are running current account surpluses and government debt as a percentage of gross domestic product is relatively low.

For example, for China, debt represents less than 20% of GDP; for the U.S., debt is 70% of GDP — and rising. China has accumulated massive foreign exchange reserves of US$1.8 trillion, which it can use for a variety of purposes, including the purchase of resources or investments.

Even if Asia’s exports slow down, Asian governments are in a position to provide economic stimulus and create jobs through strong infrastructure spending.

“Governments are in a position to prime the pumps,” Ong says. “This time, the financial crisis is not in Asia.”

The biggest challenge facing Asia, he says, is the financial unravelling of the U.S. and its impact on global growth. Although Asian banks were not exposed to the subprime mortgage mess, the Asian economy is still reliant on exports.

“If there is a deep recession in the U.S. and Europe,” Ong says, “Asia will not be spared, given its reliance on exports.”

However, because of the Asian governments’ financial strength, those countries can pull more monetary and fiscal policy levers to stimulate their economies. Inflation has moderated, he says, and interest rates can be cut.

In addition, Asia has become more diversified, in terms of its export destinations. In 1995, 22% of China’s exports went to the U.S.; now, the U.S. is the destination for 16% of exports. Overall export growth in China has dropped to 20% on an annualized basis, vs 30% last year. But even at this slower pace, exports are still booming, Ong says. He expects China’s economy to grow by 9.2% this year, down from 11.9% in 2007. In 2009 he expects the pace to slow further to 8.2%, which is slower but still strong by global standards.

“China recently signalled a loosening in monetary policy with some cutting of interest rates,” Ong says. “The government wants to keep up the pace of growth to create new jobs.”

There has been a lot of spending on infrastructure such as roads and railways, he says. There has also been significant rebuilding in Sichuan, the province in central China that was devastated by an earthquake earlier this year.

“If there is a global economic slowdown, the transmission to Asia would be through external trade,” Ong says. “Domestic consumption is intact. There was some reduction in activity prior to the Olympics to cut back on pollution from the factories, but activity has resumed.”

Ong is a bottom-up investor, and runs a concentrated portfolio that holds 63 stocks. His top 10 holdings account for 30% of the $83 million in assets under management in the portfolio.

He has recently been adding to holdings in the financial services sector, which, he says, bore the brunt of the selling pressure as a result of the subprime mortgage problems in the U.S. His biggest holding in the sector is Shinhan Financial Group Co., a South Korea-based banking company.

Ong has also been adding health-care stocks to the portfolio and is optimistic about Mindray Medical, a China-based company that manufactures patient monitoring and diagnostic equipment, including ultrasound imaging machines.

@page_break@Ong has lightened the portfolio’s weighting of consumer discretionary stocks, which could be vulnerable to a consumption slowdown. He is also concerned that some companies in this sector are facing higher costs as a result of rising commodity prices, and may have difficulty passing these costs along to their customers. Nevertheless, one of his favourite holdings remains China Mobile Ltd., the largest telecommunications company in China and its biggest seller of cellphones. China Mobile has a dominant 72% share of the China market and cash reserves of US$18 billion, which give it plenty of leeway to increase dividends. It recently traded at a reasonable price of 10 times earnings.

Ong’s largest holding is Korea-based Samsung Electronics Co. Ltd. He also has some resources exposure, including integrated oil giant PetroChina Co. Ltd. and Zijin Mining Group Co. Ltd., the largest gold-mining company in China.

“If there is any downward pressures on the U.S. dollar,” Ong says, “gold will hold its own.”

On a geographical basis, 35% of the fund’s AUM is in China and Hong Kong, 20% is in Korea, 20% is in Taiwan; the rest is in various Southeast Asian countries. Ong is steering clear of India, which, he believes, is overvalued despite its record of rapid growth.

India has one of the few governments in the region with current account and fiscal deficits, he says, which gives the country less spending flexibility to mitigate any global economic slowdown. IE