Asia-pacific markets have been challenging, to say the least, in the past six months. As concerns about inflation in China put a damper on stocks, the earthquake-triggered tsunami in Japan that claimed an estimated 25,000 lives only exacerbated matters.

Although fund managers remain optimistic about the region’s prospects, some have become cautious on Japan while others have taken advantage of buying opportunities.

“Despite the inflationary concerns and the underperformance from last November to February, Asian stocks are poised to outperform again,” says Chuk Wong, vice president at Toronto-based Goodman & Co. Investment Counsel Ltd. and manager of Dynamic Far East Value Fund. “First, inflation is going to soften sometime in the middle of the year. The best time to invest is when monetary tightening is coming to an end. Second, Asia, which is export-driven, will benefit from a stronger U.S. economy.”

Moreover, Wong adds, stocks in emerging Asian countries are trading at about a 10% discount to the U.S. and mature Asian markets, such as Hong Kong. Although U.S. stocks are trading at 13.5 times current-year earnings, stocks in emerging Asian markets are at an average price/earnings ratio of about 12 times.

Although the disaster in Japan saw valuations tumble, Wong had less than 2% of the Dynamic fund’s assets under management in that country at the time (vs an MSCI all-country Asia-Pacific index weight of 38%). Still, he took advantage of the sell-off to increase modestly the fund’s exposure to Itochu Corp, a leading Japan-based trading company with interests ranging from textiles to iron ore mines.

“[Itochu is] an indirect proxy for the Japanese economy,” says Wong. “But it’s a very challenging market for me. It’s not the most attractive market in the region, and its valuations are too high.”

A bottom-up, value investor, Wong favours stocks in China (33% of the Dynamic fund’s AUM, vs 11.4% in the benchmark) and Hong Kong (13.8%, vs 5.1%). There is also 9.4% of AUM in Indonesia, 7.7% Thailand and smaller holdings in markets such as India.

A favourite name in the 50-stock Dynamic fund is China Liansu Group Holdings Ltd., the largest plastic pipe manufacturer in China. “It is well positioned to benefit from a major water conservancy project in China,” says Wong, “and a program that will build 36 million housing units over the next five years for lower-income people.”

The Hong Kong-listed stock is trading at about HK$7.73 ($0.94) a share. In spite of a strong run in the past year, Wong believes, there is further upside. He has no stated price target.

Another favourite is Bank Rakyat, a dominant player in Indonesia’s microbanking sector, which serves many rural communities. The bank, which is more than 100 years old, benefits from high barriers to entry. “It is very much relationship-driven,” says Wong. “[Bank Rakyat] hires bankers who grew up in the village and grant credit to people they know very well. It’s a great proxy for the growing rural economy.”

The Dynamic fund acquired its Bank Rakyat stock about seven years ago, when Indonesia was recovering from a period of financial and political stress. The stock, which has split twice since, is trading at IRD6,150 ($0.70) a share. Wong says there is more upside.



Japan Still Offers Attractive opportunities, says John Millar, a Japanese equities specialist with Edinburgh-based Martin Currie Investments Inc. and co-manager of TD Pacific Rim Fund. “We continue to find stocks that look very cheap. This would include a lot of global-leading names within the automotive industry, and the technology sector. Japanese companies still retain a strong competitive advantage in areas such as electronic materials,” says Millar, adding that Japanese stocks offer an important counterweight within a broad Asian portfolio.

But there are some serious near-term risks arising from the massive damage to the Japanese automotive industry that could have global implications. “We’ve become aware that the damage is not limited to a few factories. There have been a number of knock-on effects, such as a shortage of key components and supply bottlenecks,” says Millar, who shares fund-management duties with Jason McCay, lead manager and head of Martin Currie’s Asia and global emerging-markets team.

Because the short-term scenario looks very challenging Millar has reduced the TD fund’s exposure to Japan. “Stocks look quite cheap, but they are vulnerable to sharply lower near-term earnings expectations,” he says. He adds that the fund has sold some Japanese consumer-discretionary names and reinvested the proceeds in materials names in the region. “It made sense to reduce our exposure in the hardest-hit areas, with a view to buying back again in a couple of quarters.”@page_break@Meanwhile, prospects look better in fast-growing markets such as China, says Millar: “We are more comfortable with the outlook for emerging Asian markets and the kind of resilience [they’ve shown] in an environment of price inflation and rising interest rates.”

About 31% of the TD fund’s AUM is in Japan, with about 11% in Hong Kong, 11.6% in China, 12.3% in Australia and smaller weightings in markets such as Hong Kong and Taiwan.

Running an 80-name portfolio, Millar and McCay like firms such as South Korea’s Hyundai Mobis Corp., an auto parts maker and a unit of Hyundai Group. Hyundai Mobis has been gaining market share from Japanese firms that are constrained because of the strong yen and bottlenecks arising from the tsunami damage. Despite recent upward earnings revisions, the stock is still reasonably priced, says Millar, noting that it trades at 11 times 2011 earnings and 10 times forward earnings.

Acquired two years ago, Hyundai Mobis stock is trading at about 331,500 Korean won ($291) a share. Millar believes there is about 30%-40% upside over the next 12 months.

Another favourite is Hong Kong-based AIA Group Ltd. The TD fund acquired its AIA shares last autumn when AIA was spun off from American International Group Inc., the once-dominant U.S.-based insurance giant. “This is a broad play on rising consumer wealth and income,” says Millar, adding that the former AIG subsidiary has been in the region for 90 years.

The stock is trading at about HK$24.50 ($3) a share. Millar expects AIA will be a multi-year holding, and estimates the stock could grow by about 15% a year.



Mark Lin, Vice President, international equities, with CIBC Global Asset Manage-ment Inc. and manager of CIBC Asia Pacific Fund in Montreal, was one of those who bought during the Japanese sell-off. “The disaster couldn’t have come at a worse possible time, because of the high levels of public debt and high budget deficit,” says Lin, a bottom-up, growth-at-a-reasonable-price investor who maintains a low-turnover portfolio. “That said, we were buying on the sharp drop in equities markets. There are still strong companies whose risk-reward looks quite appealing.”

From an asset-allocation perspective, Lin has long maintained a low weighting in Japan of around 24% of the CIBC fund’s AUM because the longer-term prospects are better in markets such as China. The fund has 16% of its AUM in the China, plus 23% in Australia, 14% in Hong Kong and smaller weightings in India and South Korea.

Yet, Lin seized the opportunity to acquire a few Japanese names, such as Rakuten Inc., which owns and manages an Internet-based consumer electronics operation and a consumer auction site similar to eBay. “These companies generate very good cash flow and high return on capital,” says Lin. “[Consumer electronics] is one of the few areas that is growing within Japan.”

Rakuten’s shares are trading at about ¥73,500 ($825.50) a share, although Lin paid about ¥68,000 during the sell-off. “It was a buying opportunity,” says Lin, noting that the stock is trading at 21 times 2011 earnings. “I don’t believe the business was disturbed by this event.”

Running a 40-name portfolio, Lin tends to favour companies that are industry leaders, demonstrate growth, have strong management and use capital efficiently. From a sector standpoint, Lin also favours health-care stocks (33% of the CIBC fund’s AUM), financials (18%) and consumer staples (16%) because their earnings are more predictable than cyclicals such as resources.

One of the top names in the CIBC fund is Ramsay Health Care Ltd., an Australia-based global hospital operator with facilities in Australia, Britain, France and Indonesia. Ramsay “executes very well, domestically and overseas,” says Lin. “It’s riding on the strong demand for quality, private health [care]. We think its earnings can grow in the low teens going forward. It has a very capable management team.”

The stock is trading at A$19 ($19.10) a share. Lin has no stated target.

Another favourite is China’s Hengan International Group Co. Ltd., which manufactures personal hygiene products such as disposable diapers. “In China, they’re the No. 1 diapers, and are riding on rising consumer spending,” says Lin. “With growing urbanization, parents that didn’t use diapers before are starting to use them now. We think that Hengan’s earnings growth can be around 20% a year over the next few years.”

The Hong Kong-listed shares are trading at about HK$63.90 ($7.80) a share. IE