Fundsupermart has an update on one of our recommended funds - UOB United Asia Fund. We speak with its fund manager, Janet Liem.
Author : Bharathi Rajan
Untitled Document THERE'S QUITE A BIT HAPPENING IN ASIA (Fundsupermart.com) The immediate prognosis for the Asian region isn't exactly rosy at present. But to be fair, a lot has to do with the current state of the global economy than anything else. Most importantly the US economy is slowing down after several years of high growth. Major corporations have revised their earnings forecast and are expecting slower growth ahead. This news has affected Asia which depends substantially on the US for trade. Despite this, fund manager for the UOB United Asia Fund, Janet Liem, remains rather upbeat about the region.
ASIA - DOWN BUT NOT OUT
Statistics indicate that Asia is slowing down. For example, Singapore said GDP growth for this year would be around 5-7%, down from last year's 9.9%. Preliminary forecasts by Hang Seng Bank indicate a similar story for Hong Kong. But picture for Asia, Liem says the region isn't that badly off. Unlike two years back, it is in little danger of descending into another financial crisis.
"The region is better insulated compared to 2 years back. Our fiscal position is looking a lot stronger. And in terms of fund flows, last year we saw massive outflows from the region. We expect to see liquidity coming back, and that is a powerful force in favour of stock market performance. For month of January we have seen rather encouraging fund inflows into the region," Liem notes.
She says the higher liquidity in the financial system is a direct result of the Fed's decision to slash interest rates. Lower interest rates make borrowing easier for companies and increase money supply. Liem says that whenever the US is in easing mode, economies that have a pegged currency or linked exchange rate with the US tend to benefit most of all. In this case she points to Hong Kong as the main beneficiary. But adds that South Korea and Taiwan will benefit too.
Stocks that have been beaten down and now trade at attractive levels are another reason that Liem is optimistic about the region. She believes that such stocks should soon be due for an upside, although she admits that certain markets in North and Southeast Asia do carry substantial political and economic risks.
UOB UNITED ASIA FUND
The UOB United Asia Fund is underweight in Indonesia due to the shaky political situation. But it's the reverse with South Korea. The fund is overweight in Korea even though it has been experiencing problems with corporate reform. "... Korea is trading at 7 times PE ratio this year. And we are looking at growth in excess of 30 percent. We don't deny there are some inherent risks, and that we are going to see some volatility in the market. We prefer North Asia to Southeast Asian markets at this point because of the political risk, policy changes, and so on in Southeast Asia..." Liem says.
UPBEAT ON HONG KONG, SINGAPORE AND TAIWAN
Other economies that Liem is upbeat about include Hong Kong, Singapore and Taiwan which together (minus Korea) make up 62% of the country allocation of the fund (see table below). "We are overweight in Singapore because we feel that within the Southeast Asian bloc, it's the most defensive market. The quality of earnings is more superior than the other Southeast Asian markets. In the case of Hong Kong and China, the opening up of the Chinese market and also the imminent entry into the WTO will obviously benefit Hong Kong as well..."
Liem is also upbeat about the longer term prospects for North Asia, although its tech sector has suffered from the jitteriness of the NASDAQ. The fund, she says, will not trim its exposure in this area. Rather it will take a longer term view, as she sees several opportunities for growth. She anticipates that big tech firms will start outsourcing their operations to cut costs and Asian companies are well positioned to benefit.
Country Breakdown (as at end Febuary 2001)
Singapore - 14% Thailand, Indonesia, Philippines - 2.5% Hong Kong - 29% Taiwan - 19% China - 13% Korea - 17% Others - 5.5%
BULLISH ON CELLULAR TELCOS AND DEFENSIVE STOCKS
Although TMT stocks still account for the largest portion of the fund at 32% (see table below) - the portfolio has taken a more defensive turn in recent months. Defensive stocks such as consumer and utlities are traditional buffers during periods of slower growth due to their steadier earnings. Some of the defensive plays that Liem likes include Hong Kong fashion label Giordano, and Hong Kong Electric.
Liem also thinks Asian cellular telco and IT software stocks should do well. Unlike their European counterparts which overspent on 3G licences, she says several Asian cellular telcos have little debt and plenty of room for growth. Plus, she says they are trading at very attractive levels. "Several Asian telcos are trading as low as 8-9 times earnings. Korean telcos are trading at 4 times earnings. We think that there are growth opportunities there. Generally the outlook is pretty good. And the IT services sector as well. We have not seen any downgrades yet from management. And the orders are still quite robust."
Liem says the UOB United Asia Fund combines stock selection with a top-down approach that gives a 40% weighting to macro-economic factors. As the stock market is still quite volatile, she says the fund does trade more frequently in order to take profits.
Despite the weaker economic outlook for Asia, she's confident that minus unforseen circumstances, investors could see a 20% return on the fund this year. "I think after such an awful year last year...I think that this will be a better year simply because so much liquidity has been built up in the system. Assuming that the oil price stays the same and doesn't go haywire like it did last year, I'm quite comfortable with an 20% return for Asian markets."
Performance of the UOB United Asia Fund as at 31 January 2001 (Cumulative Returns)
Source : UOB Asset Management; Benchmark = MSCI AC Far East Free ex-Japan