Fund manager's comment/Diamond Lee
Since the end of last year, we have been gradually increasing the beat of our Asia Pacific portfolio. We believe now is the time to accumulate equities in the region: valuations are attractive relative to other equity asset classes and earnings forecasts have become more realistic.
In an increasingly globalised economy, no country is insulated from the economic slowdown and a number of Asian countries rely heavily on their export sectors. Taiwanese electronics companies reported poor sales for May and Taiwanese exports fell 23% over the month. But, although further earnings downgrades are possible in the Asia Pacific region, there are indications the downward momentum may have troughed.
This is an important factor if you look at the experience of Korea, one of the most cyclical economies. During the last slowdown, the Korean market bottomed out some six months before earnings momentum became positive again.
Portfolios have to move in advance of the earnings improvements starting to come through and this is what we have been doing over the past few months. A large portion of the 13% cash we had allowed to build up by November last year has now been invested in quality growth stocks and we are considerably less defensive.
For example, we are overweight in Hong Kong property stocks and Australian growth stocks. We remain underweight in financials as they tend to underperform at initial stages of recovery.
Asia Pacific markets will be looking for further evidence of earnings having bottomed out over the next few months. Sector rotation is likely to continue until it becomes clear that global conditions have turned a corner.
On the positive side, the market has some room for error if further earnings disappointments do materialise. Having rallied well in April, markets rose further in May with growth stocks performing well. In particular, China, which together with Hong Kong makes up the largest part of our portfolio (43%), continued to move higher. This was due to its robust economy, which is also helping to keep demand high in much of the region and providing a buffer from the slowdown in the rest of the world.
We recently took some profits in the China stocks that have done extremely well. At a regional level, we remain underweight in Southeast Asia.
As far as sectors are concerned, many strategists are now recommending resources over technology as the supply outlook is much better. We agree with this analysis and have been overweight in resources, especially oils, for some time. We will look to add to our exposure in this area over the summer months.
We also moved to a neutral stance on technology stocks in February/March and have been adding to our weighting on a stock-by-stock basis since then.
Valuations relatively attractive.
Earnings forecasts more realistic.
Downward momentum may have troughed.
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