Asian domestic stories remain strong while exports struggle

The domestic story continues in Asia as managers remain bullish on the region. Both the Atlantis Asia Special Situations fund and Occo Asia fund have been favouring Asian domestics while moving away from IT companies, which have been involved in exports.

James Wier, analyst at Atlantis, says: "Domestic stories we favour include banking stocks in Korea where we have an overweight position.

"This sector has been reducing its costs through consolidation and will benefit from a strong economy as consumers wish to borrow money to spend on goods and services."

Meanwhile, the Occo Asia fund has a sector bias towards China because of the strong economic growth in the region.

KC Reddy, manager of the Occo Asia portfolio, says: "Gross domestic product for the first quarter this year was 10.2% annualised. A stock we believe will benefit from the domestic story is ladies shoe retailer Hongguo, which recently announced plans to increase retail penetration across China by opening more outlets.

"Stronger potential earnings growth coupled with the fact the stock was trading at a price/earnings ratio of only 10, a significant discount to peers, resulted in a re-rating in the stock. In 2005, sales in China reached renminbi 425.5m (£28.78m) compared to 294.5 in 2004."

In Hong Kong, the Atlantis portfolio has an overweight position in property. Wier says property stocks have been strong performers because unemployment remains low, 5.1% in April, while consumer demand remains strong.

However, he warns there are risks to the sector if US rates rise further because the Hong Kong dollar is pegged to the US currency.

One area that both Atlantis and Occo do not believe will perform well has been exports because of a potential global slowdown and the strength of Asian currencies especially the Korean won against the dollar.

The Atlantis Special Situations fund has been underweight the Korean IT sector because inventories have increased in the semi-conductor industry as higher prices slow demand.

In addition, Wier explains the increase in the cost of raw materials has put pressure on the industry, by making some plastic components more expensive to build. He says this has put a squeeze on profit margins.

One sector the Occo Asia fund is concerned about is Korean telecommunications exports and Reddy has initiated a short position in the country's digital display manufacturer LG Electronics.

Reddy says: "Optimism about the success of LG's new GSM handsets in the European market and its translation into higher margins is misplaced.

"Competition continues to remain intense in the high-end handset sector and any success LG may enjoy in gaining market share will be negated by higher research and development and marketing expenditure.

"Furthermore, outlook for LG's display businesses looks gloomy going into the second half of the year and a strong Korean won is unlikely to be helpful."

Reddy has also decided to short Chinese computer company Lenovo, due to concerns about aggressive competition in the PC sector and the company's high valuation.

The company has a P/E of 119.29 times compared to the market average of 81.96. He explains recent announcements by Dell to cut PC prices aggressively to sustain market share aggravated investor concerns about profitability at Lenovo.

The group's annual results shows turnover was HK$22.5bn (£1.6bn) for 2005 compared to HK$23.2bn in 2004.

key points

The Asian domestic story continues

Exports are under pressure

Korean banking stocks to do well

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