By Ruth Alexander Martin Currie's Asia Pacific fund has moved underweight in Taiwan and Korea while...
By Ruth Alexander
Martin Currie's Asia Pacific fund has moved underweight in Taiwan and Korea while going overweight in China, Hong Kong and Singapore.
Adrian Mowat, head of the Asian desk at Martin Currie, said the former countries are suffering from having made too fast a recovery from the Asia crisis, which took the pressure off governments and countries to reform.
Now that the situation has settled down somewhat, the lack of restructuring progress in Taiwan and Korea has become apparent.
Mowat said: "People are still euphoric about tech stocks and, as a result, their valuations are extreme. Martin Currie prefers to be overweight in interest rate-sensitive stocks, such as banks and property, at the moment. We are consequently underweight in the tech-led Taiwanese and Korean markets and overweight in China, Hong Kong and Singapore."
The portfolio has a 4.7% exposure to Taiwan compared to the MSCI Asia Pacific Free (Japan) index weighting of 13%. Only 4.4% has been allocated to Korea compared to the benchmark of 12.32%, with the group identifying micro-economic difficulties in this market.
Mowat is bullish on Asia on a 12 to 18 month view. He said the region was very inexpensive relative to other global markets.
"Many markets in Asia have halved, and yet there is still very high corporate earnings growth. The P/E has been falling because earnings have been rising," said Mowat. "We have, however, been running underweight in Taiwan for a while. Due to the correction phase in technology stocks which has been in effect since April, the Taiwan market, which is dominated by semiconductors, has been suffering. Indeed, 80% of the Taiwan market is invested in the technology sector.
"Furthermore, the Taiwan market is dominated by retail investors who are worried about the seeming lack of political stability. The new administration, the Democratic People's Party, which displaced the long-serving Kwomintang government is new to the position and very inexperienced."
Mowat said Martin Currie has a particularly good insight into the state of Taiwan for two reasons: Weimin Chang, who works on the group's Asia desk, is from Taiwan; while Chris Ruffle, a director of Martin Currie, lives in the capital, Taipei.
According to Mowat, Korea is also disadvantaged by its heavy involvement in technology.
Korea's financial industry is still burdened by the Asian crisis and has a debt of 100 trillion won, equivalent to $150bn.
Of vital importance has been Ford's recent decision to pull out of acquiring Daewoo motors; Daewoo has debts of £25bn, Mowat said.
The problem is worsened by the fact Korean individuals are only willing to put their money in banks that they trust, and, therefore, are often turning to the foreign banks, he added.
Many of Korea's banks are not trusted as they have been lending money to what Mowat believes are riskier companies. A large number are insolvent because of bad debt, according to Martin Currie which also believes many investment trusts are insolvent because they own corporate bonds that will never be repaid.
Mowat said: "The result of all this is a credit crunch. Money is not getting through to the economy efficiently. The stock market is declining as people sell assets to realise cash."
The Martin Currie Asia Pacific fund has 15.4% of assets in China, compared to the benchmark weighting of 6.6%.
It has allocated 34.5% in Hong Kong, in contrast to the benchmark weighting of 18.39%, while 15.7% of the fund is exposed to Singapore, compared to the benchmark at 8.52%.
In Hong Kong, 5% of the fund is invested in the property company, Cheung Kong, and 5% in the Hong Kong Exchange, which is also a listed company. These are Martin Currie's two largest stock exposures in the portfolio. The fund invests 3.5% in the largest Singapore bank, DBS Group, which makes up less than 2% in the regional index. City Developments, a property stock makes up 3% of the fund.
Mowat said: "Due to the continuation of the reform process, China has very positive inflation statistics. Martin Currie has a weighting of 4% in Petro China, China's largest producer of oil and gas. We have a weighting of 4.5% in China Unicom, a mobile phone company which has 10 million subscribers and which also owns a fibre optic data back bone that will connect 200 cities in China."
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