Mr Evan Erlanson, chief executive officer of Asian equities fund manager Seres Asset Management, said today that global equity markets continue to focus on the positives as risk appetite grows.
He added that, while Seres believes that there are clear long-term opportunities for investment in Asian markets, current valuations may have overshot fundamentals.
“We believe that care and research are still required in order to identify the best-performing investments and to find the attractive opportunities contained in Asian markets,” he said.
Mr Erlanson outlined considerations when investing in Asian markets, including:
Hong Kong
- There are areas that are likely to remain strong, and Hong Kong may benefit in particular from the rare combination of China’s fundamental strengths and easy global liquidity flow. The Hong Kong market is likely to hold up better than either the domestic China A shares or the US markets.
China
- While China continues to be talked about as the global success story that will lead countries such as Australia out of the downturn, investors should remain aware that China’s government may not respond to issues in the way that is usual in other countries. For instance, the precipitous fall of the US dollar may prompt policy responses in China which will be equity-unfriendly.
- Overall, Seres believes that China has completed its recovery phase and is now moving into an expansionary phase. Data shows very strong growth – for instance, retail sales in August were up 15.4 percent year-on-year, reconfirming the recent uptrend, while automotive sales have risen 29 percent since the start of the year and are expected to hit another record high in September. For the full year 2009, China is forecast to take over the US as the number one auto market globally.
- However, export growth will have to pick up where infrastructure projects left off, which brings us back to the question of developed market consumer demand.
Japan
- Among Asian economies, Japan has suffered the most from the global economic slowdown. The combination of export dependency, a resurgent Yen, and political upheaval has made Japan a very unpredictable place for the past 12 months. Economic signals are not as bad but still not terribly promising. For example, August department store sales are down ten percent year-on-year, although up slightly (two percent) for the month.
- GDP is rebounding, but underperforming compared to the rest of the region. The government’s new fiscal and economic stimulus plan – JPY16.8 trillion in direct stimulus (3.5 percent of GDP) – will focus on raising household income instead of infrastructure projects and will begin to take effect in April 2010.
The Yen
- Seres sees the relative strength of the Yen as the key to the Japanese market and view current strength as technically-driven and unsustainable. Picking the turning point for Dollar/Yen will be the most important part of getting the market right in Japan and will also heavily influence Seres’ view of Korean exporters.
- Consensus is sharply divided on the Dollar/Yen issue, with one camp arguing for the Yen to strengthen to 80-85 versus the USD by year end, with the other camp contending that the fiscal weakness and slow prospective growth of the Japanese economy warrants a 20-30 percent weakening of the Yen.
- In Seres’ view, the Japanese Homeland Investment Act (adopted in April) has increased Yen demand by incentivising repatriation of profits from overseas subsidiaries, particularly toward the end of fiscal quarters. There has been a notable acceleration in repatriation of profits since the Act’s implementation.
- Corporate hedging has reinforced the Yen’s strengthening trend, especially considering recent sharp exchange rate movements.
- The new DPJ administration has a nominally “hands-off” policy toward Dollar/Yen, but investors will need to wait and see whether this is in fact the case.
- The large output gap will keep economy in deflation and the Bank of Japan on hold beyond 2010.
- The USD is joining, if not supplanting, the Yen as a carry trade currency. However, assuming Japanese economic growth remains tepid while US/Euroland rebound, Japan will be at the tail end of a global tightening cycle and the Yen will weaken as Japanese investors seek returns overseas.
Japanese corporate activity
- The key issues for Japan are the operating leverage effect and potential upside surprise for corporate profits; and how conservative the new government will turn out to be, which may have major consequences for banks and large corporates.
- Japanese non-financial companies saw an unexpected return to profitability in calendar Q2 2009, due mainly to sharp cost-cutting, particularly labour. China demand and domestic stimulus also played a role.
- On balance, consensus earnings revisions are turning positive for Japanese companies, but guidance has remained relatively unchanged despite positive Q1 results.
- Non financial profit is declining in 2009 but is a likely beneficiary of massive operating leverage in 2010.
Japanese banks and the government
- Japanese banks are under pressure from several different angles and generally continue to be a cautionary tale. Loan growth continues to slow (1.2 percent year-on-year growth in July) and could turn negative in six to nine months. There are question marks regarding the new administration’s attitude toward loan restructuring.
- Calls to adopt stricter capital adequacy requirements are increasing, and there is a potential need to raise additional equity. In addition, the adoption of internationally accepted accounting standards also introduces unknown variables.
- The government may not provide liquidity support for large corporates, which will affect credit costs for banks.
Korea
- The Korean market and its major export-oriented constituents have experienced strong performance due to three main themes:
export competitiveness due to Won weakness
- strong China demand, particularly for IT products
- operating leverage – GDP has seen a sharp rebound along with exports.
- Mr Erlanson said that Seres is currently focussing on downside risk factors.
“Equity valuation has more than priced the recovery in fundamentals, driven simply by the abundant liquidity. This liquidity support is unlikely to be withdrawn anytime soon, but the rich valuation combined with longer-term macro uncertainties dictate a “Sell-on-Rally” bias,” he said.
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For further information please contact:
Evan Erlanson
Phone: +852 3656 3366
Email: evan.erlanson@seresam.com
Disclaimer: This material has been prepared for general information and does not constitute a recommendation or financial advice and is not to be relied on as such. The information does not take into account the objectives or circumstances of any individual and we recommend consultation with a qualified adviser prior to making investment decisions. No warranty is given as to the accuracy, reliability or completeness of the information and no liability is accepted whatsoever for any error or omission in this material resulting in loss or damage of any kind suffered from reliance on this material.