Wealth managers keep faith with Asian equities

Despite the headlong rush into fixed income by private clients around the globe, private banking asset allocators across Asia still favour equities over bonds.

“Equity yields look more interesting than corporate bond yields,” says Chew Soon Gek, head of strategy and economic research at Credit Suisse in Singapore. She is not expecting a Greek exit from the euro and predicts a containment of the crisis.

Following this positive scenario, Credit Suisse continues to believe in the outperformance of developing over developed markets, with China, Hong Kong and more recently Singapore raised to overweight positions. While the Swiss bank is underweight Philippines, Malaysia and Indonesia, these markets are still expected to outperform their Western counterparts.

“Given the developments in Greece, we prefer defensive and quality markets,” says Ms Chew. “This means Singapore is back on the radar again.” Buy-rated Singapore stocks include industrial real estate investment vehicle Ascendas Reit; bus, taxi and car rental group ComfortDelGro; and Fraser and Neave which manufactures soft drinks as well as the famous Tiger Beer.

Indeed, Credit Suisse is expecting 18 per cent upside in the Singapore stockmarket over the next 12 months, compared to 14 per cent in Indonesia.

The key issue in Jakarta is that earnings are coming down due to margin pressure, while valuations are not cheap. But an expected price-hike to heavily-subsidised fuel is now off the table, because oil prices have fallen, making the outlook more optimistic.

What is driving Indonesia’s growing economy is domestic consumption, she says. “People are going out to buy motorbikes and fridges, there are tremendous opportunities in Indonesia,” she says. Her favourite stock picks, in a heavily populated country, are generally family-run companies such as Indofood and cement maker Semen Gresik.

When it comes to resource-led stocks, Credit Suisse prefers Thailand to Indonesia, with coal producer and distributor Banpu getting a special mention. The bank expects 26 per cent earnings growth across the board in Thailand, compared to 12 per cent in Indonesia for 2012, although Singapore is still preferred for the highest equity allocations.

Across the Asian region, Ms Chew also recommends Malaysian group Air Asia. “They have significant expansion plans for low cost travel for middle class consumers right across the region,” she says, with new landing spots planned in Japan, Korea and Philippines.

The notion of buying dividend-paying stocks is central to the current thinking of many portfolio managers, both regionally and globally. Like Credit Suisse, EFG Asset Management is betting on Asian stocks continuing to provide healthy dividends.

While most investors in Europe have been aware of this stratgegy in their own and US markets, few have been aware that dividend-gathering also applies to the high growth Asia Pacific markets, says Tony Jordan, portfolio manager of EFG’s New Capital Asia Pacific Equity Income Fund.

This policy has outperformed in nine out of 11 years since 2000, he says, even working in India, where it is rare for stocks to pay a reasonable dividend. Dividend stocks tend to be off higher quality than the rest of the market, because businesses simply need to make more money in order to regularly pay off investors, says Mr Jordan.

He sees telecoms as today’s standout performers in Asia. While they have previously been favoured for their defensive qualities, he expects them to enter a growth phase this year, following roll-out of low-cost smartphones and fourth generation networks.

“Growth is being driven by the rapid increase in data usage as consumers gravitate towards Facebook and other social networking sites as well as constant use of the Web,” says Mr Jordan.

Further to the North, China is going through a period of political transition, says Credit Suisse’s Ms Chew, with uncertainty amplified by the recent controversial exit of and criminal charges made against former regional leader Bo Jilai. “China has more recently accelerated its policy response to weak economic numbers by cutting the reserve ratio requirement, lending rates, accelerating project approvals and property fine-tuning policies.”

However, she maintains that Chinese company valuations remain attractive, compared to the rest of Asia, with further expected benefit from policy-easing measures. This is something Lim Say Boon, chief investment officer at leading regional player DBS Wealth Management concurs with. “Indonesia, along with Thailand, are not particularly cheap markets,” says Mr Lim. “We have turned more bullish on China, with a 12 month overweight view.”

Chinese valuations, he says, are the cheapest of any major Apac market and there are clear indications of a turnaround in monetary policy. “China is at the bottom of the growth cycle, it only gets better from here and it this is an opportunity to buy in.”

Fears of political transition may be slightly overplayed, he suggests. “If the Bo Jilai affair is as bad as it gets, then it really isn’t that bad. The party appears to have closed ranks and put this behind them.”

The widely heard argument that China’s fixed cost investment model is somehow not viable and needs restructuring, is also vastly overcooked, believes Mr Boon, with China’s infrastructure development still way behind that of developed economies such as Australia or the US. “Talk about China having overspent on infrastructure is exaggerated. China will pause; it is moving towards a greater dependence on domestic consumption and lower net exports. That will take time. It is a decade-long process and life goes on.”

The risk of contagion

The key downside risk in Asia is emanating from Europe, believes Singapore-based Adeline Ng, head of Asian fixed income at BNP Paribas Investment Partners.

Asian markets are not yet pricing in a Greek default, even though a Greek exit from the euro is fast becoming a consensus call among the majority of leading investment banks, she says.

She also sees a spectre of pent-up inflation, driven by a combination of oil and food prices, as most Asian countries are net importers of oil.

“Food prices were a worry in 2008,” says Ms Ng. “If we look at Korean Kimchi or Indonesian chillies, consumers were resorting to planting vegetables in their own houses back then. You cannot dampen food prices through monetary policy, only through extra supply.”

Despite these cautious observations of a highly logical economist, Mr Ng, who has been introducing the BNP Paribas investment process across a variety of Asian markets, including Indonesia, is highly optimistic about the prospects for her region.

“A lot of people are worried about government debt in China and talk about a hard landing, but the debt to GDP ratio is still less than 30 per cent,” she says, a fraction of the ratio in more “advanced economies” such as Germany and Japan. There is still room to cut interest rates in China and the same can be said for the rest of Asia, she adds.

“Asian governments have reserves and the ability to act through both monetary and fiscal policy. Asia also has a willingness to spend if things deteriorate further. I am not concerned about Asia.”