04.03.2013


Investment Manager:

CIMB-Principal Asset Management Berhad

(March 2013)

 

How has the Fund performed recently compared to its peers and are there any particular stocks or areas where it is performing well?

YTD (to February 19 2013) the fund has achieved a return of 2.13% while the benchmark’s return is 1.75%.  Some of the big capitalisation technology stocks like TPK, Lenovo and TSMC and consumer related stocks like Myer, Brilliance China, Baoxin and Sa Sa International have been the primary drivers of this out-performance.

What factors are you expecting to influence Asian Pacific markets this year?

The factors we see influencing regional markets this year include the stabilisation of the Eurozone, which has increased considerably since Mario Draghi, the President of the European Central Bank (ECB), announced the LTRO programmes. This aggressive stance significantly reduced tail risks from the crisis. However, from time to time we will see bouts of uncertainty flare up.  The austerity programmes are painful and targets are difficult to achieve in the time-frame prescribed. Because of these severe ‘pains’ we could see some nations wanting to ‘backslide’ and financial markets will not like the uncertainty.

Momentum of growth in the US is tentative and at a delicate stage and could be stalled by a small shock exogenously or endogenously. Growth in 1H2013 could be affected by the resumption of payroll tax and lower government spending as the sequestration kicks in. Furthermore, the Federal Reserve has to carefully navigate an exit to its QE programmes without upsetting the financial markets.

 

Likewise, growth momentum in China is fragile. The Xi JingPing government will need to balance generating 7% to 8% economic growth without igniting property prices. Credit growth in 2009 to 2011 was excessive. Hence, the Chinese government needs to reign in any further excessive credit growth while providing enough support to achieve growth targets.

 

Except for Korea, impending stimulus programmes are unlikely to have significant impact and most Asian markets should benefit from successful Abenomics [a combination of monetary policy, fiscal policy, and economic growth strategies to encourage private investment, as advocated by current Japanese Prime Minister Shinzo Abe]. A weaker JPY is not a major competitive force for most Asian markets as Japan is not a direct competitor. On the other hand, a stronger Japan would help some of these Asian nations’ exports.

 

The domestic drivers of most Asian countries are rather benign. Monetary policy will likely see a long pause (neither easing nor tightening) and there is unlikely to be a major shift in fiscal programmes.

Slowing growth in the Chinese economy has been a major investment topic for some time now. What has that slower growth meant for investment opportunities in both China and wider Asia bearing in mind China’s economic significance in the region?

Slower growth in China could be a blessing in disguise as strong growth in the past was not sustainable and led to undesirable developments such as high inflation and credit bubbles. Continued slow growth in China would mean further downward adjustments in cyclical sectors. There is room for a decrease in some excess capacities and unrealistic commodity price expectations.

 

Defensive growth sectors where there is supply discipline or which have undergone industry consolidation are well placed for a slower but more sustainable growth environment. The power sector in China, consumer-related sectors, especially those with strong brand franchise, green energy, such as wind and solar power and LNG providers, will enjoy government support. The telecoms sector has strong cash-flow and will see benign competitive pressure due to its oligopoly structure and could out-perform against this backdrop.

If the Chinese economy does pick up again in 2013 how long would it take for that improvement to feed through to other economies in the wider Asia Pacific region?

Inventory is fairly lean now and information flows are very efficient in the internet age, therefore, we are likely to see a ripple effect filtering through in a couple of months. However, our central scenario is that China is likely to see modest growth this year. The Chinese authorities would like to keep growth at a moderate pace so that some of the problems faced in 2011/2012 will not emerge again, i.e. a surge in property prices and high credit expansion.

Many investors believe that 2013 is going to be another year of low growth in all regions, including Asia Pacific. Would you agree and if so, how will you approach such an environment in terms of investment decisions?

Slow growth is our base scenario. As noted before, we will focus our investments in the defensive growth sectors and keep a low emphasis on cyclical sectors.

Governments in many Asian nations have a stated aim of re-orienting their countries’ economies away from heavy reliance on exports to domestic demand. How are countries in the region progressing with this economic rebalancing and how is this transition affecting investment opportunities?

Many of the smaller economies in the region are well advanced in their rebalancing, as evidenced by current accounts turning from surpluses to deficits, for instance, in India, Indonesia, Thailand and the Philippines. Consumer related and domestic sectors like utilities and telecoms, which are highly cash generative, are the primary candidates to play this theme.

The Asia Pacific region encompasses a lot of investment markets. While the advantages of diversification are well known, are there any drawbacks to investing across such a wide range of markets and, as a portfolio manager, how do you deal with these?

Our investment process is driven primarily by bottom up stock selection. We invest in stocks that provide the best risk reward. Nevertheless, if the fund is too skewed in certain sectors or countries our risk management analysis would require the portfolio managers to re-assess the risks taken and reduce any deemed unnecessary because of a lack of diversification.


Are you considering any investments for the Fund in regional markets where it does not already invest, and if so, why?

We are invested in most of the markets in the region. Smaller markets like Vietnam, Myanmar and Cambodia are still too volatile and not cost effective given that their investible universe is still small.

If an investor came to you and asked ‘why should I invest in the Asia Pacific region rather than another region?’ what would you say?

Our investment expertise is mostly focused on the Asia Pacific region, hence, we are not able to comment on opportunities in other regions. Nevertheless, we believe in the long-term growth prospects of the Asia Pacific region for the following reasons: It has been one of the world’s most dynamic and strongest-growing regions in the recent past and this trend will continue; the region has many countries with favourable demographic trends, i.e. India, Indonesia, ASEAN countries; the likes of Japan, Korea and Taiwan are at the forefront of technological innovation that rivals that being carried out in the US and Europe; the region has large saving pools that can continue to invest for the future - China, Japan, Taiwan, Korea, Singapore, Malaysia etc. have some of the highest foreign reserves in the world; it has a huge population base and market, encouraging thriving intra-regional trade.

 

How do you see the prospects for Asia Pacific markets and economies in the next six months?

Prospects for the Asia Pacific market are dependent on, progress in Eurozone deleveraging, continued growth in the US and healthy growth in China of 7% to 8%. We think equity market volatility will increase in the next few months.  Equity markets have rallied strongly recently and we have a host of uncertainties to navigate through. If uncertainty levels connected to any of these three themes rise, we could see markets correct. Nevertheless, a correction is healthy and would provide an opportunity to buy into good companies selling at a better price.

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